Taming that scary passive bubble myth

Posted by Robin Powell on September 6, 2019

Taming that scary passive bubble myth

 

I loved The Big Short, the 2015 movie starring Christian Bale as Michael Burry, the hedge fund manager who famously spotted the bubble in the US housing market in the run-up to the financial crisis. It’s an excellent film with plenty of important lessons for investors.

But I’m getting rather fed up with hearing about Burry’s recent remarks about index funds. Burry apparently believes there is a passive bubble, that index funds have become too popular.

It’s an idea that keeps receiving attention, despite the fact that, over the years, it has been thoroughly debunked. We’ve written about it many times on this blog. In the past few days, the likes of Josh Brown, aka the Reformed Broker, and MoneyWeek editor John Stepek have done a job explaining why it simply isn’t true.

I’ve come to the conclusion that this is a story that will never go away. The reason? There are too many people with a vested interested in persuading us that this is something investors need to worry about.

All we can do is keeping presenting the facts, and in that spirit, I’d like to point you towards an article that Ben Carlson has written on the subject on his blog, A Wealth of Common Sense. Just for once, I’m not going to pick out the highlights, because I’d like you to read it in full.

Before you do, though, consider this. Even if there were an indexing bubble, what difference would it make whether you invested passive funds, active funds or both? When you buy an index fund, you are literally buying the stock market in proportion to the shares held by all active investors. In the event of the bubble bursting, all investors would be exposed to it, active and passive alike.

Ultimately, investors’ primary responsibility is to themselves and their loved ones. They have to do what’s best for them, not the investing industry. Any bigger, structural issues that may or may not exist are for the industry and the regulators to address.

 

Here’s Ben Carlson’s article:

Debunking the silly “passive is a bubble” myth

 

 

Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.

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