Most of the time, it's the best way to invest. Fund managers are so wealthy, often not because they make great picks, but they use manipulative tactics to get people to invest with them. Most of them can't beat the market.
What happens when everyone is in an index fund though? The efficient market hypothesis goes right out the window in that case. I can imagine a crash happening because of that maybe. It feels the same with the last thing that caused the crash. Everything thought house flipping was "easy money" so everyone did it. The second everyone does it, it's not valuable anymore.
When everyone is in an index fund, the market becomes less efficient and several profitable opportunities are overlooked (and conversely, failing companies take longer to be recognized as failing). That means bigger returns for active investors who are both confident and right. Eventually the market equilibrates as people start realizing certain active investors are consistently beating the market and shift cash from index funds into their funds.
It's unlikely to result in a crash, though, rather a period of sustained underperformance and a few people getting fantastically wealthy. You could argue that the tech-billionaire phenomena is the primary capital markets example of this: there's a widespread belief that founding a new business is foolhardy and you're better off working for an established company, so people who buck this belief and are right end up making a lot of money off it, which draws a lot of people away from employment and into entrepreneurship, which drives down average returns to entrepreneurship as most of the new startups wash out and fail to beat the market.
Well, it can be foolhardy depending on how much you gamble and how competitive and with how high barriers of entry the market you want to compete in is. Also how local.
Real economics are never quite as easy as a single equation. A more proper model would be similar to weather modelling.
You may be right, but I think we aren't there yet. We've got too many active trading firms delivering little value. As more money moves into index funds and ETFs, only the best active traders will survive.
As well, I've also been lead to believe that many hedge funds aren't simply trying to make the most money, but are trying to ensure a safety net. They are promising they won't lose more than X% no matter how crazy things get. There's value in that.
> As more money moves into index funds and ETFs, only the best active traders will survive.
That’s probably fine. I don’t see why active traders should get any money at all from outside sources other than venture capital here and there when they have a proven opportunity to scale that’s bigger than their market cap can fund. And those opportunities should be an easy sell to almost anyone with restless cash.
Why should good traders be rewarded with sales? Good traders can make their own money. The only traders who need sales to survive are bad/exploitative ones.
