I would submit the only reliable method of allocating capital — by either business operators or investment managers —i s to know what one is allocating capital to. This seemingly obvious statement gets to another problem with indexing that has become increasingly apparent in the wake of looming economic destruction.
Regardless of its proponents’ intentions, indexing subtly slips the bag into the hands of the citizenry, creating an ever-ready supply of fresh bag holders.[ ] unaware that they’re holding any bag at all. Indexing is only beneficial insofar as it gives one an arbitrary way to invest in a certain sector or country’s economy. But the use of the 20th century as a proxy for what the economy will produce now and forevermore is naïve and dangerous. Bear in mind this isn’t the first time the “experts” have nudged the general population to some set-it-and-forget-it scheme. From railroad stocks in the latter half of the 19th century to real estate and mutual funds in the mid-2000’s, there exists a common historical theme of the general populous somehow getting the raw end of the stick.
Granted, many times the damage is done by their own speculative fervour.
Just as often it is caused by some grand narrative taking hold—some newly discovered absolute truth. None of this refutes the basic argument for indexing—that the average investor cannot expect to select decent investment managers, hence should accept market returns.[ ] But they should understand they are getting both the good and bad, and they should not expect great wealth to be generated via the approach.
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