The last 30-40 years, stock Index Investing has become very popular, especially with the creation of 401ks and the explosion in mutual funds. The strategy of these index funds basically says keep cost low, mirror the stock market and over time you’ll outperform actively managed funds which trade frequently and run up trading fees. It assumes that markets are efficient, or prices reflect all available information. And. an example of one could be something like the Vanguard total stock market index.
So, I believe the popularity of Inex funds will decrease for three reasons.:
(1) IMO, Stocks have been overvalued for way too long. There is way too much optimism in the market right now. Now we’ve seen very stagnant growth historically in the stock market for long periods of time and there’s no reason to believe that companies will continue growing profits. Money has been easy for too long the last 20 years and what’s more telling is that productivity is terrible, the labor statistics are misleading, with big losses in full-time jobs and gains in part-time jobs. To make matters worse, more and more people don’t want to work, and especially long hours.
So, productivity is headed in the wrong direction. We’ve seen more talk of 32 hour work weeks and more people choosing work life balance over taking on additional responsibility at their jobs. If companies don’t innovate, we can’t expect cash flows to continue to increase.
And what’s really interesting is the stock market performance in real terms.
For example, at the peak of the dotcom bubble, in real terms it took 14 years for the stock market to reach a new high- and again this is factoring in our ultra-low-rate environment and easy money.
The economy has changed post covid. It’s not clear where things are headed still. May people are still working remote or hybrid 4 years after the Pandemic.
(2) Economic Turmoil. I believe Inflation is going to persist although I’m torn right now when the Fed will begin cutting rates. But high inflation leads to consumer confidence dropping and economic investment decreases. This should have a negative effect on stock prices as people look for more conservative investments.
Generally speaking, the economy is in a fragile position right now as we have accumulated massive debt. At some point, a recession will come, and I believe it’s going to hit the American people and the global economy hard.
As a result, people will begin going more and more into safety, and leave stock index funds.
(3) One other reason Stock Index investing is dying is that other investment options are becoming more attractive. Index funds are really meant for the average joe. But we see a lot of young people heading into crypto and other speculative assets already and I expect this trend to continue. I also expect that more and more middle-aged people are going to begin to shift away from index funds and toward more conservative assets like bonds, CDS, savings accounts, precious metals and other types of safer assets. Retirees and Boomers usually don’t have much of their nest egg in stock index funds, they have a lot of savings in home equity, and have higher percentage in bonds and other hard assets.
Now, I believe that you should own some equity, and diversify, but not as much as traditional finance suggests. I usually hear keep 10 percent or less in non-traditional assets like real estate, gold, silver, and land – and to keep the rest stocks and bonds. But I think a higher percentage, depending on your circumstances should be considered. And this is going to depend on things like age, cc debt, student loan repayments, how safe your living situation is, etc. Generally, the older you are, you should own more conservative investments, as you want to preserve capital.
Thanks
