Seems like there are lot of opinions on the increased popularity of indexing, so I will add one more to the mix.
I think indexing will continue to increase in popularity until it stops working. What does stop working mean? It means when the average market performance is down (for a period of time longer than two weeks).
Sure, everyone likes indexing when the average performance is up. Or significantly up. Folks don’t feel bad about being average, because of their low cost, low effort strategy. Plus there are news stories about how their strategy is beating some smart hedge funder to make them feel good.
I’m guessing that they’re not going to care about how low cost their strategy is if the average market performance is a loss. Average will become unacceptable. They won’t feel smart.
And then there will be news stories about investors who aren’t average, who didn’t lose money. At that point, investors will be start looking for other strategies.
To be clear, I am not predicting market losses. I’m just saying that it’s going to take sustained market losses across broad asset classes to create an inflection point in the current index investing trends.
Also, this is not a referendum on the effectiveness of indexing investing. In all likelihood, it’s the the most optimal strategy over the long run for the vast majority of investors out there. Is your thesis really based on most investors doing what’s optimal at all times? Since when has that happened?
That’s my two cents…
It’s felt pretty good, on average, to invest in *anything* the last three years….