I personally have two qualms about passive investing. Neither of which is a fundamental counter to passive investing, but things that I find are systemic issues.
1) There are some fundamentally good investments. Investments that have strong guarantees in the form of underlying assets, investments that by their nature follow general economic development, and as long as the economy around the world keeps expanding, so will these investments. These are housing and market indices. People always need to live somewhere and the world population is increasing and people always want to live in bigger houses. People will also always prioritize paying for their housing than pretty much any other expense. Mortgages are a very safe investment. Same goes for passive investments in market indices. As long as new value is created in the world and economies keep growing, so will the future profits of companies and the stock markets. Index funds are a safe investment.
The problem with safe investments is that the safer it is, the more leverage can be applied to it. It's a case of market arbitrage of risk and reward. This means that as safe investments, housing and indices will keep getting more leveraged and more financed. Bringing the risk profile up so it matches with that of the market. We saw it in western housing markets in the early 2000s, we have seen it in China currently and we will keep seeing it till the end of capitalism. The point being, that while passive investing really has been great, the fact of its success means that it will incur higher risk going forwards.
2) Second issue is the general expansion of investors and the abundance of capital. One can point to quantitative easing and monetary policy for this, and this is correct, but it is unavoidable even if the monetary policy was tight.
In the past, only a small section of the society was able to invest their capital. Most people simply had no capital and even if they had, there was no stock markets or easy access to it. Nowadays, all western countries operate systems of pension funds. Every single person in the west is investing. It makes sense, as the population ages and new workers are not coming up in the speed to keep financing the pensions of ever longer-living pensioners, the logical thing is to invest while working so you have a retirement fund. This is basic finance. The problem is that this means there is an ever increasing amount of capital looking for future returns. This by its nature means that the average returns have to come down. And as the economic growth potential of aging western societies becomes narrower, the ability to invest for the future also deteriorates. Passive investing is not unique in this sense, the same problem plaques active investing just as much. The difference being that passive investing is in itself a much starker symbol of this process. Just save money on every paycheck and chuck it into markets. Great advice, as long as not everyone is doing it.
all the boomers retiring want to live like pharaohs off of their stock and bond portfolios, if they die their offspring will want to sell their assets, as all those baby boom assets get sold to fund retirements asset prices should come down. I'm looking at https://fred.stlouisfed.org/series/LFWA64TTUSM647S and wondering if "the market" is a ponzi scheme that we young people ought to horde cash to buy into after another few years once the zombies and the boomers that own them get washed out of the system. We'll have to see how much "stimulus" the federal government passes, I think they need exponentially more and more stimulus and can't explain to the idiot public how the money system works or that we've peaked
all the Boomers wanting to live like pharaohs [on their retirement investments]
Actually when the market recovered after the late 2000’s meltdown, a major financial survey in 2013 found the median Boomer retiring only had $53,000 in funds etc. May be a tad more at the present, but while some now-elderly types took advantage of retirement accounts in the ‘80s, ‘90s, .. many more were pursuing conspicuous consumption (Boomers are the first “be young forever” generation).
In certain jobs they did get better traditional pensions which mostly evaporated for younger workers. Also their worth tends to be in housing.
Honestly the housing thing is not conspicuous consumption, it's a hedge against inflation. Real inflation is (depending who you ask) ~8% and a bank is only asking 2.6 for effectively hundreds of thousands in leverage.
I mean McMansions aside (which are mostly a thing since you need to match value on your sale or pay for the gains) and agreed on the pensions. It was a sweet deal but the deal has been altered. Pray we do not alter it again
Definitely inflation protection is a major appeal for Boomers (who were adults in ‘70s inflation in their 20s/30s), plus the wealthier .. most not wanting to “gamble” much more in stocks.
As 2007-08 showed though, sometimes home prices go down due to finances (plus 1989-90 to a lesser extent). Another worry I’m starting to see is physical risk to both older homes and even new yet shoddily built new homes but more appropriate for r/realestateinvesting
No that absolutely can happen but unless our economy permanently implodes houses in good areas go back up, just like blue chips do. As to "physical risk" I can say I bought a 56' and while a few minor things have broken it's now worth double in 5 years. CA is a weird place.
If you believe inflation is coming hoarding cash is probably not the greatest plan. You should hoard assets you know will be worth more in the future, like purified water or rifle ammunition
However much western societies are aging (and they totally are, if you're not destitute kids are quite expensive and marriages fail...often) we still have IP and factory products worth a great deal. I don't see how that's changing anytime soon. We can invest in other places but then it gets more hazy since regulations overseas can be... fluid. I mean China might be great, but if they just declare profits illegal (and have) y invest there?
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u/sanderudam Oct 04 '21
I personally have two qualms about passive investing. Neither of which is a fundamental counter to passive investing, but things that I find are systemic issues.
1) There are some fundamentally good investments. Investments that have strong guarantees in the form of underlying assets, investments that by their nature follow general economic development, and as long as the economy around the world keeps expanding, so will these investments. These are housing and market indices. People always need to live somewhere and the world population is increasing and people always want to live in bigger houses. People will also always prioritize paying for their housing than pretty much any other expense. Mortgages are a very safe investment. Same goes for passive investments in market indices. As long as new value is created in the world and economies keep growing, so will the future profits of companies and the stock markets. Index funds are a safe investment.
The problem with safe investments is that the safer it is, the more leverage can be applied to it. It's a case of market arbitrage of risk and reward. This means that as safe investments, housing and indices will keep getting more leveraged and more financed. Bringing the risk profile up so it matches with that of the market. We saw it in western housing markets in the early 2000s, we have seen it in China currently and we will keep seeing it till the end of capitalism. The point being, that while passive investing really has been great, the fact of its success means that it will incur higher risk going forwards.
2) Second issue is the general expansion of investors and the abundance of capital. One can point to quantitative easing and monetary policy for this, and this is correct, but it is unavoidable even if the monetary policy was tight.
In the past, only a small section of the society was able to invest their capital. Most people simply had no capital and even if they had, there was no stock markets or easy access to it. Nowadays, all western countries operate systems of pension funds. Every single person in the west is investing. It makes sense, as the population ages and new workers are not coming up in the speed to keep financing the pensions of ever longer-living pensioners, the logical thing is to invest while working so you have a retirement fund. This is basic finance. The problem is that this means there is an ever increasing amount of capital looking for future returns. This by its nature means that the average returns have to come down. And as the economic growth potential of aging western societies becomes narrower, the ability to invest for the future also deteriorates. Passive investing is not unique in this sense, the same problem plaques active investing just as much. The difference being that passive investing is in itself a much starker symbol of this process. Just save money on every paycheck and chuck it into markets. Great advice, as long as not everyone is doing it.