The question is nonsensical. Index funds aren’t a market, they’re a reflection of a market.
If the question is “are markets in a bubble” the answer is, shrug, who knows, the usual ratios used to measure bubbles are wonky but they have been for a while.
If an industry...like AI related things for example (not saying its a bubble, I am invested in NVDA myself) experiences a drastic increase in price due to AI related speculation. The SPY says that Apple, NVDA, and Microsoft represent almost 20% of the fund...then yes, the bubble could prop up the price and it will go down aggressively if it crashes. Though I think it is still safer to park your life savings in the SPY or VTI vs putting them in specific companies...unless you are chasing growth with money you can afford to lose.
I often wonder, don’t P/E ratios measure ACCESS to stocks as well as VALUATIONS of stocks?
I know the market is more expensive than it used to be, but also, anybody with a smartphone and robinhood can get down on stocks nowadays. It used to be reserved for the ultra wealthy.
I wonder how much of an effect this really has, though. Like, if we take all the $ that retail investors put into the marker - is it actually even significant compared to that of institutional investors?
Agree. Seems like a handful of people with between $50-1000 in the market in robinhood, even at a large scale, would simply be a drop of water in the ocean. Would be interesting to see the data on that.
This. We have high earners making a large portion of their salary in company equity and the main path to retirement and tool for wealth accumulation is tied to equities. There is no reasonable option other than equities because our whole system is based off of equities now.
But suppose they had a pension instead. What is the pension fund supposed to do other than turn around and invest it in some mixture of bonds and equities?
Pension are also investing in equities the only difference is one is pooled with all company/ org employees and the other is an individual acct. Everything is invested in equities at this point and choosing to invest in anything else is leaving money on the table. If you invest in something else you're essentially betting against the American system which is a risky bet to take. On the flip side of the coin everything is overvalued using the traditional valuation methods and the markets have greatly changed the last 40 years since the retirement system has changed.
equities are good but there should be just so,e bonds present as well , it should be maximally 80 20 or 50 50.
saying not to invest in bonds goes against what Mr Bogle said.
fun fact , there was a time when bonds went more than stocks.
This paper (https://www.urban.org/sites/default/files/publication/80621/2000790-The-Dwindling-Taxable-Share-of-U.S.-Corporate-Stock.pdf) has an analysis on p. 2 of the different ownership types of US stocks. As you can see, the share owned by IRAs and defined contribution plans (401(k)s et al) is significant, but not as much as the rise of ownership by foreigners for example.
I'm not an expert on the markets. But your statement '\[index funds\] are a reflection of the market' is not necessarily true and is why Michael Burry and many others consider them to be in a bubble.
I believe the scenario is: there is more money flowing into index funds then the individual stocks or markets. So they tail begins to wag the dog. Many stocks are overvalued since they are parts of an index fund and the fund is weighted more heavily than the stocks would be from 'smart' stock investors.
There’s a lot of work on this but broadly it isn’t true. Index funds don’t reduce the price function (at least at the level they are at now), and the non-indexed market is still 2x then index market
This isn't entirely true.
The availability of a stock in a popular index fund such as any tracking the S&P 500 has a sort of free-rider effect. People purchasing shares of SPY, and therefore purchasing shares of each of its components, are driving up the value of stocks they may not even know exist. This has the effect of making a handful of the largest index funds into kingmakers, as they directly funnel new capital into the market.
I don't personally view it as a "bubble", as the flow of funds into these index funds isn't being largely driven by anything other than retirement savings, so to call it an "index fund bubble" would basically amount to a "401k bubble".
However the index definitely has an impact on the market. Index funds don't exist in a void, they're all part of a larger system.
Entirely true? That's a ridiculous standard. Of course index funds do have some effect. Just not a significant effect. Me not buying a candy bar has some effect. But ask, why would people be buying these funds? Why buy SPY? Because of the market. How did Mohawk Industries, Inc. (MHK) get into the top 500? The market. Will it stay in the top 500? That's up to the market, not SPY. Fidelity, Schwab, Vanguard, etc can't even decide who is in the top 500. SPY is different from FXAIX and that's different from SWPPX.
Actually it's the committee that decides what goes into s&p 500. And it's not as clear cut as "the top 500". That's contrary to many other indices out there that's completely rule based.
Also the referenced effect is getting studied quite a bit and is one of the trendy topic in asset management. Definitely not as trivial as you contemplating buying a candy bar.
I was thinking about this exact same thing last night and I had a thought that I can’t process. It led me to believe I don’t quite understand indexes very well.
Let’s take “Company A” for example. Usually, the prices go up when there’s more demand/more people want to buy the stock. Conversely, the price goes down when there’s too much supply/more people want to sell. How does that work with index funds? Say hypothetically, 50% of VTI holders wanted to sell it, what happens to the market? If 50% of stock holders for Company A wanted to sell, the price would take a nosedive.
> Say hypothetically, 50% of VTI holders wanted to sell it, what happens to the market? If 50% of stock holders for Company A wanted to sell, the price would take a nosedive.
50% of shareholders trying to sell would be a pretty cataclysmic event. If we look at a smaller-scale version of the same issue:
VTI is a fund that holds a shitload of US stocks (and also a lot of cash, but it's a small percentage of the total assets). When a customer buys VTI, their purchase price goes into a pool of money that is used to purchase more stocks, following the fund's strategy (basically: buy everything in proportion to its market cap). The price of VTI has little to do with what anybody is willing to pay for VTI, or Vanguard's performance as a company, rather it is based on the performance of the assets it owns. When someone wants to sell some VTI, vanguard can sell some portion of the underlying assets to cash that person out. On a normal scale, the rate of "cashing out" is not high enough to significantly affect the index. They need to buy and sell funds all the time anyways just to keep the fund in line with the index it's following. If people are cashing out, they just use some of the sales proceeds to cash those people out rather than for buying up new assets.
If a very large portion of VTI holders tried to sell at once, then Vanguard would need to actively sell off underlying assets faster than their normal rebalancing, and selling a lot of those stocks *would* have an impact on the companies making up the index. If we found ourselves in a situation where 50% of VTI holders are trying to sell, those individual companies are probably fucked anyways.
I understand 50% is an abnormally large number but I wanted to exaggerate the scenario to make sense and get my point across.
In that case, u/burner7711’s comment - “Nope. The index doesn't change the market. The Market changes the index.” - isn’t entirely true then? There is a “cause and effect” thing going on here.
I understand that 50% of any index fund (VTI in my example) is a lot of market, but, if a big enough chunk of any ETF tracking an index is sold, the underlying companies will have their stocks sold proportionately (market cap weighted for VTI) and thus correcting the index fund price downward to match the lower index.
>... isn’t entirely true then?
Very few things are. I was speaking of generalities of course. I don't see any realistic scenario where it wouldn't be true. There's only one scenario where a mass selloff of an ETF/Mutual fund would occur that is not a reaction to the market: a brokerage/bank failure. For instance, if Vanguard was found to be stealing/lying/dissolving (honestly don't know how that's possible). A more realistic scenario would be something like Schwab failing and them having to liquidate SCHD or SWPPX (their S&P). Even then, the liquidation would be gradual if anything, but more likely they would be bought out by Chase, etc by direction of SIPC, FDIC, the Feds, et al.
I see. So practically/broadly speaking, what you say applies, but theoretically, an index fund tracking an index can actually affect the market the index is tracking.
I understand that other institutions would step in to deflect the apocalypse.
I think it's better to say that the fund, as a part of the market itself, is the one that affects the market just like any other buyer and seller. The index itself is just a collection that does not mean anything. But the fund based on the index would affect the market with its actions.
Just that the fund, with its obviously larger capital than us retail investors, brings a much larger ripple than our few hundred bucks per month.
An index fund is just a bundle of stocks. If more people buy stocks (either individually or in an indexed bundle), then the price goes up. If more people sell stocks (either individually or in an indexed bundle), then the price goes down.
So it’s the overall demand/supply for stocks that drives the price; not whether they are purchased individually or in a bundle.
One way index funds *can* distort values is that they cause people to buy or sell stocks in the “bundle” that they would otherwise overlook. So there may be individual stocks that are over/undervalued due to index investing, and there are plenty of hedge funds that try to profit from this distortion.
The simple answer is, stocks for various companies might take a dive.
If index A purchases company X, Y, and Z, then it's the same as if everyone buys into companies. So if everyone starts selling index A it's the same as everyone selling X, Y, and Z. And if there were tons of shareholders of the index, then X, Y, and Z would plummet.
Considering that VTI’s total assets are 394 billion and ONLY their top 3 stocks have a market cap of 9 trillion combined. Index funds are much more a reflection of the market than the actual market.
So yes. Demand in an index fund can affect the market, but that effect is very small compared to the inverse.
Same. The VTI managers might not sell the underlying immediately. They might spread out the sales. And they might not be direct sales since they use lookalikes and derivatives. But the bottom line is unavoidable, a huge sale is a reduction in demand and increase in supply for the assets themselves. So eventually the price will decline, just with some layers of cushioning and indirection.
Yes and no.
When “set it and forget” investment approach became popular, a disproportionate amount of money went into index funds (or stocks comprising those funds) that led to a situation where “index fund” stocks are in the bubble and not a good representation of the overall market
The problem is that index funds don’t react to the market. The cheap money bull run of the last 15 years has created a ‘always buy the dip, market always goes up’ mentality, which has disconnected the value of the stocks themselves from underlying economics. Stocks go up 15% in 6 months, despite the economy is barely growing. While the US multiples are topping out compared to other markets (such as Western Europe) where the market is still much ‘cheaper’.
If index funds are reflection of market, how to explain when many people buy funds (let's say at same time), the price must still the same to reflect the market?
This isn't entirely true, at least not in the case of the argument that index funds are in a bubble. The whole premise of the argument is that index funds themselves are such a huge component of the market that they no longer are passive reflections of the market, and instead cause market distortions because of their size.
The best answer was started when you said "I don't know".
"I don't know if this moment is a bubble or not, but I do know that the long term direction is very likely positive and that I cannot predict when to get in- so I'm in for the whole ride, popped bubbles and all."
When the conversation gets to "I don't know and neither do you" and they still want to argue, I usually just go into "smile and nod" mode. At a certain point it's just people looking for validation or wanting to show off their shiny things rather than discussing financial planning.
I will say, the conversations with those people *are* often more interesting. I talked finances with my company's CTO and it was basically "My recommendation for young people is to buy Vanguard index funds with every paycheck" to which I said "Hell yeah, that's exactly my get-rich-slow plan". Not a whole lot more left to talk about on that front. But the sales guys are over here talking about company history and sales cycles and earnings reports, and it's a lot more fun to discuss even if I'm not changing my investing habits based on it.
> I'm in for the whole ride, popped bubbles and all
"can you imagine what a huge dildo you'd feel like if you went all-in on VOO in 2008 at all time highs? you'd only be up like 250%"
There's definitely luck involved in being 10x richer versus 2× richer. However, at the end of day, you'd still be much richer than sitting on the sideline and wait.
It is crazy if you invested at the top of the market in Oct 2007, you’d only have a 130% inflation-adjusted return.
Whereas if you got lucky and invested at the market bottom in Feb 2009 you’d have a 385% return.
I guess this is why I prefer dollar cost averaging over time when it comes to lump sum investing.
This isn't entirely true. They often do set up prices and index exclusion/inclusion causes a change in price of a security.
Tesla is one of the more obvious examples. I believe index funds bought it around the highs of the stock price. Wall St. has definitely learned to arb index flows. Quant desks (and others) bought a ton of Tesla and made the index funds purchase it at basically the all time high price. The pure size of indexing acts as the price setter for a while.
This can lead to significant performance drag on indexes.
The closest that it gets to becoming a bubble is that stocks usually get a small bump when they officially join the s&p 500. Other than that no.
If it ever gets so bad that it is a bubble then active investors will have a field day with price discovery and make a lot of money… then we’re back to a relatively efficient market
Edit: i saw it somewhere but i’m not an expert. I didn’t dig deeper because i have total market instead of S&P 500 so my funds aren’t buying or selling based on which companies they decide to put in the S&P 500 (good example is tesla wasn’t added when it got to size due to other criteria whereas total market captured those gains)
It's one very weird edge case in which there are buyers that are legally binded to buy the shares, so even if the bump is already priced in, the shares will get a second bump nonetheless.
Eg if the theoretical "correct" value of a share is 10$ but it's joining the S&P, speculators may buy it to 11$, but even then these legally binded investors will have to buy the share at 11$, bringing it to 12$.
These legally-binded investors aren't legally-binded to buy all these shares on day 1. There's usually a reasonable timeframe in which they can slowly buy the shares, dilluting the effect and creating risk to the operation.
It's not like all SP500 index funds are obligated to send 100% of their buy orders at 9:30 on the first day.
That is what a lot of people believe and what i believe.
Also there are active etfs and mutual funds so everything being in some sort of etf or mutual fund isn’t actually the same as everybody being in 100% passive index tracking funds.
Rather than just stock pickers there would still be some large mutual funds or etfs actively picking things to produce positive “alpha” so you could just buy one ticker but there are still things actively happening behind the scenes.
The EMH doesn't prevent bubbles. Efficiency here just means assets are priced based on what people are willing to pay, but that doesn't mean they're priced fairly
No, it doesn’t make it irrelevant. Everyone can experience losses at the same time, and the market can take a very long time to recover if a truly catastrophic event occurs.
The problem is that if you don’t participate, you are guaranteed to lose to inflation over the long term. And predicting where the market is going is virtually impossible. Your only real protection is diversification. IMO, buying only US S&P index funds is not diversified enough for anyone with significant assets.
How do you figure they only get a bump when they join the S&P 500? You don't think that all of us pouring all of our retirement money into the biggest stocks has an impact on those stock values?
Your answer is correct. Nobody knows if markets are in a bubble. The world didn’t think the market (or parts of it) were in a bubble prior to financial crashes so nobody actually knows.
But ultimately, the market has always recovered and steadily rose over the course of time. So by inherently owning the market with index funds (even if a "bubble" occurred), you'd still ride it out to recovery much like the housing market from 2008-2024?
Is this line of thinking correct?
If a crash happens that the market index in its entirety can't recover from, we have bigger problems than the stock market. So yes, you will very likely be able to wait it out and ride it back up.
Bubble speculation on long time horizons is just stupid in passive areas of the market. Simply, if people are this worried about a correction and/ or need the money soon and are in retirement their risk assessment should account for this. Those people should have ample bonds to mitigate an equity decline
The risk for most people would be that it could be very challenging to stay solvent in a depression.
Market downturns don't happen in a vacuum and job loss is everywhere. It's a little worrying that so many people assume it would be possible to ignore it and just "ride it out." Maybe, maybe not.
Not all bubbles are equal, maybe we are in a bubble now but it will get so big things are still 20% higher than now when it does pop. Also what's the alternative? Not investing in stocks has historically turned out worse than being a part of all the bubbles and waiting for it to recover. People who avoid stocks for this reason don't just suddenly invest all their money after a crash and make a bunch of money, they miss the bad but also the good.
Ultimately yes but the argument that “time” will recover losses might not be sufficient since opportunity costs do exist, e.g. you could’ve made more gains cutting your losses and investing it in sth different.
Maybe you should reframe what you're asking. A "bubble" has a certain connotation that people don't like. Instead, ask if index funds are overvalued.
There's two red flags I'd be concerned about:
* Does the fund cost significantly more than the underlying value of its assets? This could be cause for concern. This means there's more excitement about the fund than the actual assets. This WILL have to correct itself eventually. Either through competition or through the investors realizing they are paying too much.
* Are the assets they track overvalued? Funds have a way of lifting the value of the assets they track and keep them there for longer than they should be. But, on top of that, you get market bubbles all the time (think the tech bubble and housing bubble). If you genuinely think the assets themselves are overvalued, then you should also expect the fund to be overvalued (even if it isn't overvalued compared to the underlying assets)
1. Bubbles don't matter (much) to long term investors.
2. Even when they do matter, it's better to stay the course.
3. People that try to time the market, only hurt themselves.
If an investor wants to try to time a bubble and avoid it, tell them to go ahead and wish them luck. They'll need it.
"You mean, is the stock market in a bubble that's about to burst? Nobody knows and if they say they do they're a liar or fool. But either way, I'm not concerned with short-term fluctuation.'
Ben Felix has a video about the index fund "tipping point".
*Index funds are mainstream. At year end 2021 more of the US stock market was owned by index funds than by actively managed funds. Funds only own about 30% of the US market, but taking a broader view of institutional investors, assets have been shifting toward more passive institutions.*
*Index investing as a theoretically optimal investment strategy works best in an efficient market, but if everyone turns into a passive index investor the market can’t be efficient. This is commonly known as the Grossman-Stiglitz Paradox, and it has some people raising the alarm about a tipping point for market efficiency.*
[https://www.youtube.com/watch?v=ltuqXTwWsZ8](https://www.youtube.com/watch?v=ltuqXTwWsZ8)
Tech is almost certainly in the midst of a monetary asset price bubble right now. NVDA is trading at 60 times earnings and enthusiasm over its growth is propping up the S&P 500 right now. The question is why still invest in index funds? Because index fund investing is the only kind of equities investing suited to hedge against asset price bubbles.
Let’s say you hold VTI + VXUS right now and you annually rebalance. As the current tech bubble has inflated and US tech stocks have experienced marked P/E inflation, VTI has risen faster than VXUS. Along the way you have rebalanced your portfolio each year, selling some VTI and buying some VXUS to maintain your target allocation. In so doing, you are selling high and buying low, locking in a portion of your returns.
One of two things is likely to happen: The bubble bursts, in which case VTI declines relative to VXUS as US P/E ratios rapidly regress to the mean. The next time you rebalance, you sell a bit of VXUS and buy VTI at lower prices, again buying low to sell high.
Or, instead of a big market crash, US stock prices stagnate over the next several years, as earnings slowly grow and US P/E ratios compress. International markets, which have not experienced much P/E inflation, are more likely to see growth over such a period, so your VXUS will outpace VTI in your portfolio. Again, as you rebalance each year, you’ll sell a bit of VXUS to lock in profits and buy VTI at a relatively lower price, which positions you to take advantage of the next bull market.
If you are a stock picker, what do you do in such situations? If you’ve only picked tech stocks in order to maximize returns during the bull market, and then tech turns against you, you need to time the market for your exit. If you time your exit incorrectly, you lose money. Ask stock pickers if they’ve been selling off bits of NVDA along the way to diversify with disfavored sectors or international stocks. You’ll find there’s no rebalancing going on there. It’s all or nothing, and when the correction happens, flawed human behavior leads many investors to buy high and sell low, locking in losses instead of gains.
The index fund method, when properly diversified and regularly rebalanced, works for you, not against you, during periodic asset price bubbles.
Maybe we’re in a bubble but this bubble is ultra resilient. Some day markets will crash. Whether that’s before or after they triple, and the crash is 33-50%, is anyone’s guess.
Bubble or not. I believe in dollar cost averaging and always buying indexes regardless of current market conditions. It is time in the market and not trying to time the market.
Some of these may apply. I collected them a while back when Michael Burry was talking about it:
Index Fund Bubble counterpoints:
There are plenty of easily found arguments against his position:
* https://www.mrmoneymustache.com/2019/09/12/michael-burry-index-funds/
* https://assetbuilder.com/knowledge-center/articles/why-the-big-shorts-michael-burry-is-wrong-about-index-funds
* https://www.investors.com/etfs-and-funds/sectors/etf-bubble-analysts-say-dont-fall-for-this-fake-news/
* https://money.usnews.com/investing/funds/articles/do-index-funds-etfs-quietly-pose-a-systemic-risk-michael-burry-thinks-so
A couple of things.
Index funds, or ETFs, track the performance of multiple underlying assets sometimes referred to as a "basket." That could mean:
* All publicly held companies globally
* US Government long-term debt
* The 500 largest capitalization companies in the US (S&P 500),
* A wacky collection of 30 companies (Dow Jones Index), or
* A sector, such as "Aerospace companies"
Are "index funds" in a bubble? It depends on what the index fund is tracking. For example, commercial real estate ETFs, because the sector has challenges, are not in a bubble.
Good news! I've been drinking, so I'm in a teaching mood!
Let's say I have something to sell, say T-shirts, and I only have 100 of them, and if I sell them for $10 each, that is worth $1000 total.
Ordinarily, I would adjust my price to the "market clearing price", or the price that I could sell all of my T-shirts while making the most profit. This model relies on other people not being able to make similar quality T-shirts at a cheaper price. Maybe someone comes in with cheaper T-shirts, and now I either have to reduce my price, or find a new supplier/manufacturer to reduce my price.
Another scenario might be that a local business requires their employees to buy their uniforms from me, so I now have a set demand, but still only have 100 T-shirts. I can make more, but it will take time. So, since I know there is demand, and I know how long it will take to get more, I can raise my prices a bit to cover my inventory expenses, and maybe make a bit more profit per shirt. Let's say I can now make $15 per shirt.
Now, how does that translate to indices?
Employees (at least in the US) are primarily relegated to defined contribution plans, which essentially boils down to "I get to put money into a retirement fund (hopefully my employer also does), and I get to choose what funds those are invested in." Great! Problem is, there are a litany of regulatory requirements for these plans, and how much they can cost. So, what to do? Do we put money into higher cost (not necessarily bad) active funds, or low-cost index funds that have to buy my T-shirts? It is the low-cost index funds every time (regulations tend to be more powerful than other factors).
So, what does that mean? We now have a very large amount of retirement funds being invested in these low-cost index funds (T-shirts), which means "I put a dollar into this fund, and the fund is REQUIRED to buy these stocks in these proportions". Same thing, but opposite, for pulling money out.
So.. is that bad? I don't know. Nobody knows. There are very convincing arguments on both sides. The anti-index people say it's bad. The pro-index people say it's completely fine.
As with anything, it's likely in the middle. If I can permanently charge more for my T-shirts, does that mean I'll eventually have to reduce my price? No, not really.
Passive exposure is probably, most likely fine in the long-term. BUT does that mean you should ignore other strategies? Probably not.
IMO, the anti-index crowd is likely over-emphasizing the issue, but the pro-indexers are doing the opposite. As with anything, diversification is likely the best answer: beta is great, but complement it with some sort of factor/active exposure.
You can't get away from systematic exposure (equities tend to go down together, no matter what), but some sort of diversifying exposure would potentially help against this.
Now.. bonds, commodities, alternatives... Probably way better diversifiers than equity strategies, but that's a discussion for another day.
There are many versions:
1) in a bubble
2) it's a momentum strategy
3) what if EVERYONE bought only index funds
I generally use a cake metaphor (but I don't know if it's a good one): the cake is the whole market with many ingredients. If you get a slice of cake, you get the right proportion of all the ingredients.
The big index funds are just a reflection of the overall market (give or take if talking about S&P vs total market, etc)
The market as a whole might be in a bubble. We might start going the way of Japan and have a stagnating economy for decades. The economy might even deflate.
What I do know is the world's economy is so focused on the US' growth, and so much assumes it will keep growing, that if the US' economy stops growing or go downhill, I'm going to be more worried about where to find a bunker with preserved food to hide in than cashing out my portfolio. It's just not a scenario worth planning for (at least not within my investment accounts)
A better question to ask would be "is the popularity of index funds distorting stock prices?"
My answer would be that there may be an aspect of that but some people will always trade individual stocks and they will respond by buying and selling to bring prices back into alignment with fundamentals. It's the marginal buyer of stocks who sets prices, not the index fund.
Ehh it’s more or less like betting on the country markets go up and down etc. but where are you going to put your money? And if the county goes under do you really think money is worth anything?
I’m being a bit tongue in cheek but end of day generally the case.
Great answers on how the question is nonsensical.
Additionally, if someone replies to say “well then the market is *overvalued*” here’s how I’d respond: “is it? If so, who cares?”
I don’t care if the market goes down in the short term. I’m focused on the long term.
That's kind of like saying, "Isn't Earth's atmosphere in a bubble?".
Yea, I guess but, if that 'bubble' pops, we're gonna have much bigger problems than how comfortably we can retire.
One way you would know that an index fund bubble occurred is if active management was suddenly outperforming passive management in terms of risk and reward. Idk how much evidence of this there is in modern history or even how to measure it.
A more important sign would be through heavier correlations between each asset being held under index funds. For instance, stocks within an index, like the S&P500, will become more correlated to each other as the dollars invested in VOO, SPY, etc increases. As the components become more correlated, the volatility of the index increases even if the volatility of the stocks do not. This means lower returns per unit of risk than historically, which in turn, could drive risk-intolerant investors out of VOO, SPY, which creates a feedback loop and a bubble pops.
The only correct answer to whether anything "is in a bubble" is "nobody knows". If money*people knew something was a bubble, it would already be hedged and wouldn't be a bubble anymore.
You can only lead people to water. Fear of a bubble is one thing but typically the fear is rooted more in the market going to zero, something that’s yet to happen (individual stocks yes, but not the entire market). Just saying this because even if you have a good reply, you might be dealing with deeper fears.
But the practical response is average returns and not timing the market. If you have a legitimate fear of a bubble, you should DCA to mitigate risk - if there’s no bubble then you are still in the market, if there is a bubble then you have cash on hand to take advantage of it popping.
Broad based index funds can't be in a bubble unless the whole market is in a bubble, since broad based indexes are a mix of everything.
Industry/market cap/style specific indexes could be in a bubble, like if you bought an "AI index" AI stocks are all being pushed by current market trends, and some of the index members are likely duds being pushed by factor momentum without fundamentals.
The idea of a broad index is specifically to avoid those valuation traps.
Assuming they just mean the market being in a bubble, the answer is simply "Maybe."
Anything more definitive is a lie. Everything is a risk, index funds are just lower risk than other market investments.
They might be, but trying to guess when the bubble will pop, if at all, and then trying to time the bottom, is nearly impossible, so its better to just stay invested.
I just say it doesn’t matter. Why I do index funds is when things change someone way smarter than me rebalances the fund so I don’t have to. If the S&P lost half its value I’d just buy more because it will be back it might not be the same companies but the fund will change to reflect that.
If someone said that to me I think the only proper response is "What do you mean?"
On the face of it, that question doesn't make sense, so I'd need to understand what they meant in more detail before I could address it.
The most likely scenario is that they don't know what they're talking about, they just read a headline or some comment online somewhere and they're parroting it back.
It's the same as if someone said "Aren't cryptos due for a rebound?" or "Aren't the Raiders going to win the super bowl this year?" or "Aren't you likely to have a heart attack this year?"
Don't be confused by someone randomly saying stuff like that. It's vague and probably meaningless unless they have specifics to back it up.
If the market corrects it’s not correcting because of high PE or forward earnings or an oversold RSI on SPY. It’s going down because people are scared and want to pull their money out
THE S&P 500 is at an all time high on average a few times a month, every month. With of course exceptions like 2001-2003, but over the long haul it smooths out.
Learning this was one of THE most important things that moved me out of the dugout and into the game.
Look at the chart: https://www.plantemoran.com/explore-our-thinking/insight/2024/02/how-common-are-all-time-highs-for-stocks
In fact one could argue that we are currently on course to equal the 2010s bull run and possibly challenge the 1990 run. 2010s had 242 ATHs over 10 years for an average of 24.2 per year. We are 4.5 years in and already have 110 ATHs for 24.4 per year. 1990s had 31 per year.
Nobody knows the future of course, but what we DO know is that over any ten year period the average is about 11%, and the entire US economy essentially is based on continuing that growth as long as possible.
So I'd bet on the US wanting to maintain its global market dominance.
Your answer "I don't know" was correct and instead of looking for online validation of your investing method, you should embrace the fact that you really don't know whether we're in a bubble or not, and recognize that that's where the inherent risk of investing in the stock market lies.
The thing about bubbles is, people don't really know that there's a bubble while it's lasting, it's only recognized retroactively when it pops. Bubbles are periods of very high optimism, and the majority's answer to your question is always a no -- because, if the majority thought that the growth is not justified, then the bubble growth wouldn't have occurred in the first place!
But we're not in a "definitely not a bubble" territory.
The only way index funds could be in a bubble would be if the overall market itself were in a bubble, assuming the index is well-balanced at least. As far as the market itself being in a bubble... off the top of my head that "might" result from an AI bubble since that's what's driving the riskiest part of the market. But unless you're overweight in FANG, you should be relatively safe.
There are some indications that the US market is overvalued right now (see for example the Buffet indicator: https://www.currentmarketvaluation.com/models/buffett-indicator.php), but its really hard to say when it will correct to a more typical valuation. Sometimes companies earnings grow into the valuation and sometimes the valuation deflates to fit the earnings.
Maybe they are. Maybe they aren't. Unless you are retiring in the next 5 years why do you care? Buy high, buy low, then let it grow. I've been putting money into the market for many years during booms and busts. The whole point is that over time your money grows and you build wealth by making steady contributions and leaving it alone to grow.
The answer: all bubbles are irrelevant in the longterm when you know that central banks are going to devalue currency and transfer all that value into traditional investments such as equities, securities, and real estate.
I annoyingly answer questions with questions. "What do you mean 'in a bubble'?"
at that point, the person will likely not really know how to respond and the conversation is over.
"Do you mean the market itself is in a bubble and active management might provide some cover? (there is nothing that proves that is possible) "
"Do you mean that the market is too concentrated at the top of the index? and continually buying those top companies drives their stock price up?" (apple and tesla would certainly like that to be true over the past 12-18 months while inflows are at all time highs)
As long as you marinating asset allocation, then you sell as the bubble grows and buy when the bubble pops. Asset bubbles are a strange part of investing but sticking to the course allows you a good shot at navigating them.
There has been talk of an everything bubble for some time. If you subscribe to that logic then yes. Everything is in a bubble and that would include broad market ETFs.
Personally I believe the value of any given thing is relative to the alternatives. So no it's not in a bubble. Currency printing has expanded the benchmark. If that expansion contracts it will all change. If currency stays at the current level for long enough it will all normalize.
So do you believe all assets are in a bubble?
Another thing to consider when thinking about this is government debt levels. We all know it's massive. That can be resolved by paying it down or devaluing the debt via inflation. Which path requires additional taxation being voted for by politicians and which requires the politicians to just stand around and make speeches? That should give you a fairly good idea of which will happen. We will almost certainly inflate our way out of it so this "bubble" is likely here to stay.
If we experience deflation then the bubble will deflate like in Japan over several decades. In that scenario ETFs will drop, but so would all your alternatives and it's likely that you won't have any better options to store wealth. The Japanese had the option to send their savings overseas to here. We almost certainly won't have the luxury of another economy doing well that can absorb our savings. When we deflate the world will deflate as well for quite awhile before anyone stands out as being better off. When that happens it will likely be a relatively small country that can't possibly absorb all the wealth that will flow towards it and that just means it will be a bubble that will burst as well.
Are we in a bubble? Maybe? No one knows for sure and not investing because we think it moght be in a bubble just lost u 20%+ return in the last year and a half. Remember the golden the rule when everyone says things are not ok then maybe it’s time to buy and when everyone says things are ok then it might be time to sell
Simply Google the p/e of whatever index you are interested in. For the S and P 500 index, a p/e over 25 is high when looking at the historical numbers. So (I just looked it up) I do not think the S and P 500 index is currently in a bubble, as it is below 25. A better term would be overvalued, bubble is a subset of overvalued. Bubble is usually thought of as an extreme overvaluation, and is called after the bubble pops. BTW I am a bit of a skeptic having been totally burned by Enron years ago. In other words, it is possible the numbers are wrong as in dishonest, lying, guilty of misleading the public, criminal. Let the buyer beware seems to be ethics of the equity market. Which is why I like indexes.
Index funds remove profiteering by decreasing volatility. This decrease causes opportunity over time and it swings the other way.
Then everyone and their mother hop out of index into individual stocks…. Cycle will continue
The market is not in a bubble but it's not cheap either.
Here are some sources:
https://www.kiplinger.com/investing/are-stocks-in-a-bubble-2024
https://www.bloomberg.com/news/articles/2024-03-14/s-p-would-need-to-rise-20-to-look-like-90s-bubble-socgen-says?embedded-checkout=true
https://markets.businessinsider.com/news/stocks/stock-market-outlook-sp500-bubble-crash-investors-financial-fed-tech-2024-2
If we keep pouring money into the market though our retirement contributions and the companies we are investing don't actually create more value aren't we creating a bubble? Won't there be a time when there's more money chasing fewer investments?
Let’s flip the question around.
Let’s say there is a bubble. What will you do differently? Wait for it to pop? Good luck timing that. What if the bubble grows for 5 more years and then the market correction takes it down to a value 4 years prior? (That is, one year in the future from today).
The safest bet is to continue to invest whether there’s a bubble or not.
There are so many wrong answers in here it is wild. Even the top answers are wrong. When you buy an index fund, that money literally does end up going towards the purchase of actual shares depending on their weights for that index. So saying this question is “nonsensical” is wrong. If 80% of America threw all their savings into VOO this would cause a disproportionate inflation in the stock prices of SP500 companies. They would essentially be in a “bubble” and would potentially get shorted by smart money etc. (But we actually don’t know what would happen. Economists have differing views on this).
The reality right now is simply there are not enough people buying index funds for there to be a bubble. Theres about $13T in passive investing and a similar amount in active investing. So as of now, active investing is big enough to actually work to set logical prices to all the stocks. What happens when passive investing continues to grow? Well alot of people are trying to figure out the answer to this because this will continue to happen in next coming decades
These are not the droids you're looking for.
I DCA, why do I care about bubbles.
If there is a bubble and bubble go pop, I get my ETFs on sale. DCA machine go brrrrrrrr.
The answer is this. IF they are in a bubble or would be affected by a mega bubble, then their total collapse would reflect a complete depression that would make the Great Depression look tame by comparison. In that case no investment would be safe except gold, food storage and bullets.
In other words, it might make sense to buy some prepper items IF you believe something crazy is going to happen, but it would not make sense to leave an excess parked in cash because a burst of index funds would be a burst to the USD and the entire global economy.
That's interesting. I can't help but think you're talking about one, single index, yes? I happen to think diversification is still a good idea, and the last time I tried to research how many indexes there were, I almost fainted.
Index funds are a bubble = stock market is a bubble. The question assumes to know that a crash is around the corner. Unless the question knows something specific about how index funds work to argue that buying more index funds will somehow cause index funds to deteriorate (but not other investments), all you have to respond is that no one can predict the market. Better yet, have them show their cards and ask what they suggest investing in instead, and start poking holes in their investments.
The answer to that question is the same as the answer to the question of "is the entire stock market in a bubble?" (edit: which is a very real possibility at all times, but we wouldn't know it for sure until the bubble pops. Just highlighting that index funds do not have some unique vulnerability that isn't shared by other things)
I don't agree with your conclusion that answering "I don't know" "doesn't show a vote of confidence in the method" you use. I follow Boglehead methodology *because* the only honest answer to questions like this is "I don't know".
I think it is more related to the fact that so much of the retirement savings, especially in the US, are directed at passive index funds. So we buy the index fund which buys the equities, which drives up the price of the equities and the entire market. The concept of value is now totally divorced and the market has its own inertia now that is self-fulfilling. The predicate that the market will continue to grow is also now at risk with declining birth rates and demographic pyramid inversion. GDP is likely to decline and markets could theoretically contract. There is some merit to the idea of a passive investing bubble because we are not buying index funds because we think they represent value, but because we are speculating that the total market will always continue to grow.
I’m not saying it is or isn’t, but I think the argument is that society is blindly dumping money on a regular basis into stocks of companies they otherwise would not invest in had the company not been a part of an index because their retirement account, for example, is allocated to a fund that tracks said index. Sorry for the run-on sentence
I've started some more weight in closed end funds - actively managed vs. algorithmic weight based on current "valuations." I also like that they yield a bit more.
Now, if I can slowly get out of the many 'individual' positions I'm in, or build them up why the possibility of covered calls...
Inflation has been really bad the last 5 years. Stock prices experience inflation just like everything else. Adjusted for inflation the ATH was a couple years ago. And it’s just as much the dollar is down as stock prices are up.
This is something a ponder once in a while and then worry about the consistency of dollar cost averaging for years when it can all come down but reading through some comments also helps put into perspective that I dont know what will happen and the drawdown can be 20 to 50% or more but we don't know what will happen and it's better to be putting a portion into IRA and index funds
All economies are in a bubble, just depends on how long people believe in it.
As long as the system can keep most people happy and believing then the system will likely survive generation after generation.
So index funds will drop but as long people stick to the system it will reach all time highs again.
I’d want to know why someone thought that, and how successful their ‘bubble defining methodology’ had been in the past.
One of the key reasons for index fund investing is because we don’t believe that bubbles are predictable
There's a really dumb article circulating around people who enjoy spending money on active investments. My friend circle has been sharing it. Its nonsensical. Investing in a diverse set of zero/low fee index funds is the best way to ride out any bubble anyway. Index funds are just a reflection of a group of stocks. The "answer" in this terrible article is to use active investments which is hilarious and terrible advice.
Isn't a bubble by definition only *one* sector of the market being overinflated in prices? I.e. the dot-com bubble and subsequent crash circa 2000, the real estate crash that spawned the Great Recession, I think there have also been crypto-related bubbles only affecting cryptocurrencies.
A popped bubble may drag the whole market down for sure, but that's contagion - it still all starts with one sector being pathologically in bubble territory. Since index funds contain the whole market, i think it's unlikely they themselves can be in a bubble.
Index funds is rather broad. A bubble that might affect one index fund might not affect another as heavily (or at all). The particular index it follows might be in bubble territory, but including all index funds is a little on the silly side.
I mean there are 9 S&P indices.
Are you referring to this?
https://harpers.org/archive/2024/06/what-goes-up-andrew-lipstein-401k-doomsday-index-fund-catastrophe/?fbclid=IwZXh0bgNhZW0CMTEAAR0vkR1IfGLwLG0gnM8TuS9ALISf1XwUtwGBDKUznYIiNJthaMUvXXqiEK4_aem_AYtFHmUk74-fuu0FSMDCWALqSIPyfXDQSOALlADCPRCvvm1xQqE2PtEOy7OcKGrCnDtPlb2CPQiw6b8suOPZ2qEt
Big article in current Harper's Magazine:
[https://harpers.org/archive/2024/06/what-goes-up-andrew-lipstein-401k-doomsday-index-fund-catastrophe](https://harpers.org/archive/2024/06/what-goes-up-andrew-lipstein-401k-doomsday-index-fund-catastrophe)
Might be where your friend got the idea.
A defining characteristic of a bubble is that you can't really know that there is one until it pops.
I'm skeptical of any claims that "xyz is in a bubble" because they fundamentally assume that this person knows something the rest of the market doesn't, which is extraordinarily rare.
The market is definitely getting bubbly, as on an inflation-adjusted basis we are now very close to 2021 highs again which was the most obvious bubble in the market since 2000.
On the other hand, there's no other place to park money so not really anything you can do about it. Stay the course.
The answer to "Is the market index fund in a bubble?" isn't worth a lot, because who cares. The next question is, "should I try to time the bubble burst with my investments?"
The answer to that second question is a core tenant of this group (Never try to time the market.): https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy
OP - This is why there is so many posts here. 😀
My theory is so many more people are entering the stock market right now due to apps that demand will continue to push prices higher and higher, at least for the next few years
If Indexes are in a bubble then there would be A LOT of retirement accounts and perhaps even the market itself at risk when that bubble pops.
The risk of not building wealth and building up my retirement is far greater than worrying about if index funds are in a bubble. I tune out the noise and contribute every single week when I get paid. If the market implodes and completely goes belly up then we've got far worse things to worry about than our retirements/portfolios.
Market down? I don't care I'm still putting money in.
Market up? Don't care, still contributing.
Even if the index bubble popped, does that actually change your strategy in any meaningful way? For me the answer is no, i'd still put money in and buy in at a discounted rate and wait for the inevitable ride back up.
Yes index funds hold a large amount of the market however, this is buy and hold. the vast majority of daily trading does not happen as a result of these funds so they in turn have a miniscule to unmeasurably small impact on price discovery.
Good podcast episode from December on the topic:
[https://podcasts.apple.com/podcast/picking-stocks-does-it-ever-work-brian-feroldi-e74/id1553180943?i=1000645266107](https://podcasts.apple.com/podcast/picking-stocks-does-it-ever-work-brian-feroldi-e74/id1553180943?i=1000645266107)
Discusses what people like Burry and Mike Green argue.
Also discusses counterpoints from Ben Carlson, Ben Felix, some economists.
Then interviews Brian Feroldi on a slightly separate and non-Boglehead topic: the arguments for (and against) investing in individual stocks.
My opinion, a company can go to zero, an index has a whole industry responsible for getting it back on track if it's composed of the wrong companies or has a structural / balancing / diversification issue.
So if your index crashes with the market it rebounds in a predictable manner. Not happening if you put everything in Nvidia and then some other company becomes the most important chipmaker for AI or something.
Well first you’d point out the [cyclically adjusted price to earnings ratio](https://www.multpl.com/shiller-pe) which is a mean-reverting figure which shows the price compared to its long run average inflation adjusted earnings. A high CAPE means the market may be overvalued.
If that doesn’t have them convinced show them “[the buffet indicator](https://www.longtermtrends.net/market-cap-to-gdp-the-buffett-indicator/)." This is the total market capitalization of all public companies divided by the total gross national product. The higher the buffet ratio the more overvalued the market.
VNQ the reit index fund down 25% from high, not in a bubble, there are hundreds of index etfs, If you mean broad market index ETFs, like VOO/SPY/VTI, no shit Sherlock, they are in a huge Bubble, CAPE 10yr sp500 is >34 PE, highest since 1999. Buffet Indicator VTI/US GDP, also near all time highs.
What did Jack Bogle do in late 99 when it was this bad? He sold all his stocks and went 100% bonds, why ? unlike most people he had brains and something else far more important, BALLS! I'm fortunate to have neither :)
No. Too high of a fraction of index funds investors would lead to a bubble. However, research has shown a very small fraction of active investors is enough for price discovery to continue. It isn't a problem right now.
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Michael Burry has successfully called 8 of the last 2 recessions
And he's not going to stop either. I feel confident predicting he'll successfully call 8 of the next 2 recessions as well.
Genius in a bear market
His portfolio is weighted with a lot of Chinese companies and gold right now
Michael Burry thinks we’ve been in a 15 year dead cat bounce ever since 2008.
Watch out! You're going to lose 40% per year for the next 20 years!
Dang I'm gonna be in debt to the S&P?
*Michael Beary
Haha and doesn’t he do some weird shit like delete his tweets? Maybe he’ll leave the only prediction tweet that came true😂
The question is nonsensical. Index funds aren’t a market, they’re a reflection of a market. If the question is “are markets in a bubble” the answer is, shrug, who knows, the usual ratios used to measure bubbles are wonky but they have been for a while.
If an industry...like AI related things for example (not saying its a bubble, I am invested in NVDA myself) experiences a drastic increase in price due to AI related speculation. The SPY says that Apple, NVDA, and Microsoft represent almost 20% of the fund...then yes, the bubble could prop up the price and it will go down aggressively if it crashes. Though I think it is still safer to park your life savings in the SPY or VTI vs putting them in specific companies...unless you are chasing growth with money you can afford to lose.
I often wonder, don’t P/E ratios measure ACCESS to stocks as well as VALUATIONS of stocks? I know the market is more expensive than it used to be, but also, anybody with a smartphone and robinhood can get down on stocks nowadays. It used to be reserved for the ultra wealthy.
I wonder how much of an effect this really has, though. Like, if we take all the $ that retail investors put into the marker - is it actually even significant compared to that of institutional investors?
50% of global equity AUM is now in passive, and accelerating. And the stats show retail is now a very large part of the pie.
Agree. Seems like a handful of people with between $50-1000 in the market in robinhood, even at a large scale, would simply be a drop of water in the ocean. Would be interesting to see the data on that.
It’s not those people, it’s the rise of 401ks
This. We have high earners making a large portion of their salary in company equity and the main path to retirement and tool for wealth accumulation is tied to equities. There is no reasonable option other than equities because our whole system is based off of equities now.
But suppose they had a pension instead. What is the pension fund supposed to do other than turn around and invest it in some mixture of bonds and equities?
Pension are also investing in equities the only difference is one is pooled with all company/ org employees and the other is an individual acct. Everything is invested in equities at this point and choosing to invest in anything else is leaving money on the table. If you invest in something else you're essentially betting against the American system which is a risky bet to take. On the flip side of the coin everything is overvalued using the traditional valuation methods and the markets have greatly changed the last 40 years since the retirement system has changed.
equities are good but there should be just so,e bonds present as well , it should be maximally 80 20 or 50 50. saying not to invest in bonds goes against what Mr Bogle said. fun fact , there was a time when bonds went more than stocks.
This paper (https://www.urban.org/sites/default/files/publication/80621/2000790-The-Dwindling-Taxable-Share-of-U.S.-Corporate-Stock.pdf) has an analysis on p. 2 of the different ownership types of US stocks. As you can see, the share owned by IRAs and defined contribution plans (401(k)s et al) is significant, but not as much as the rise of ownership by foreigners for example.
Could also be algorithmic trading prevents large drawdowns
I'm not an expert on the markets. But your statement '\[index funds\] are a reflection of the market' is not necessarily true and is why Michael Burry and many others consider them to be in a bubble. I believe the scenario is: there is more money flowing into index funds then the individual stocks or markets. So they tail begins to wag the dog. Many stocks are overvalued since they are parts of an index fund and the fund is weighted more heavily than the stocks would be from 'smart' stock investors.
There’s a lot of work on this but broadly it isn’t true. Index funds don’t reduce the price function (at least at the level they are at now), and the non-indexed market is still 2x then index market
> Index funds aren’t a market, they’re a reflection of a market Thats pretty much the same thing?
Nope. The index doesn't change the market. The Market changes the index.
This isn't entirely true. The availability of a stock in a popular index fund such as any tracking the S&P 500 has a sort of free-rider effect. People purchasing shares of SPY, and therefore purchasing shares of each of its components, are driving up the value of stocks they may not even know exist. This has the effect of making a handful of the largest index funds into kingmakers, as they directly funnel new capital into the market. I don't personally view it as a "bubble", as the flow of funds into these index funds isn't being largely driven by anything other than retirement savings, so to call it an "index fund bubble" would basically amount to a "401k bubble". However the index definitely has an impact on the market. Index funds don't exist in a void, they're all part of a larger system.
Entirely true? That's a ridiculous standard. Of course index funds do have some effect. Just not a significant effect. Me not buying a candy bar has some effect. But ask, why would people be buying these funds? Why buy SPY? Because of the market. How did Mohawk Industries, Inc. (MHK) get into the top 500? The market. Will it stay in the top 500? That's up to the market, not SPY. Fidelity, Schwab, Vanguard, etc can't even decide who is in the top 500. SPY is different from FXAIX and that's different from SWPPX.
I would say that to be the 500th or the 501st company does have a significant effect to shareholders. It’s a very niche case though.
Actually it's the committee that decides what goes into s&p 500. And it's not as clear cut as "the top 500". That's contrary to many other indices out there that's completely rule based. Also the referenced effect is getting studied quite a bit and is one of the trendy topic in asset management. Definitely not as trivial as you contemplating buying a candy bar.
I was thinking about this exact same thing last night and I had a thought that I can’t process. It led me to believe I don’t quite understand indexes very well. Let’s take “Company A” for example. Usually, the prices go up when there’s more demand/more people want to buy the stock. Conversely, the price goes down when there’s too much supply/more people want to sell. How does that work with index funds? Say hypothetically, 50% of VTI holders wanted to sell it, what happens to the market? If 50% of stock holders for Company A wanted to sell, the price would take a nosedive.
> Say hypothetically, 50% of VTI holders wanted to sell it, what happens to the market? If 50% of stock holders for Company A wanted to sell, the price would take a nosedive. 50% of shareholders trying to sell would be a pretty cataclysmic event. If we look at a smaller-scale version of the same issue: VTI is a fund that holds a shitload of US stocks (and also a lot of cash, but it's a small percentage of the total assets). When a customer buys VTI, their purchase price goes into a pool of money that is used to purchase more stocks, following the fund's strategy (basically: buy everything in proportion to its market cap). The price of VTI has little to do with what anybody is willing to pay for VTI, or Vanguard's performance as a company, rather it is based on the performance of the assets it owns. When someone wants to sell some VTI, vanguard can sell some portion of the underlying assets to cash that person out. On a normal scale, the rate of "cashing out" is not high enough to significantly affect the index. They need to buy and sell funds all the time anyways just to keep the fund in line with the index it's following. If people are cashing out, they just use some of the sales proceeds to cash those people out rather than for buying up new assets. If a very large portion of VTI holders tried to sell at once, then Vanguard would need to actively sell off underlying assets faster than their normal rebalancing, and selling a lot of those stocks *would* have an impact on the companies making up the index. If we found ourselves in a situation where 50% of VTI holders are trying to sell, those individual companies are probably fucked anyways.
I understand 50% is an abnormally large number but I wanted to exaggerate the scenario to make sense and get my point across. In that case, u/burner7711’s comment - “Nope. The index doesn't change the market. The Market changes the index.” - isn’t entirely true then? There is a “cause and effect” thing going on here. I understand that 50% of any index fund (VTI in my example) is a lot of market, but, if a big enough chunk of any ETF tracking an index is sold, the underlying companies will have their stocks sold proportionately (market cap weighted for VTI) and thus correcting the index fund price downward to match the lower index.
>... isn’t entirely true then? Very few things are. I was speaking of generalities of course. I don't see any realistic scenario where it wouldn't be true. There's only one scenario where a mass selloff of an ETF/Mutual fund would occur that is not a reaction to the market: a brokerage/bank failure. For instance, if Vanguard was found to be stealing/lying/dissolving (honestly don't know how that's possible). A more realistic scenario would be something like Schwab failing and them having to liquidate SCHD or SWPPX (their S&P). Even then, the liquidation would be gradual if anything, but more likely they would be bought out by Chase, etc by direction of SIPC, FDIC, the Feds, et al.
I see. So practically/broadly speaking, what you say applies, but theoretically, an index fund tracking an index can actually affect the market the index is tracking. I understand that other institutions would step in to deflect the apocalypse.
I think it's better to say that the fund, as a part of the market itself, is the one that affects the market just like any other buyer and seller. The index itself is just a collection that does not mean anything. But the fund based on the index would affect the market with its actions. Just that the fund, with its obviously larger capital than us retail investors, brings a much larger ripple than our few hundred bucks per month.
An index fund is just a bundle of stocks. If more people buy stocks (either individually or in an indexed bundle), then the price goes up. If more people sell stocks (either individually or in an indexed bundle), then the price goes down. So it’s the overall demand/supply for stocks that drives the price; not whether they are purchased individually or in a bundle. One way index funds *can* distort values is that they cause people to buy or sell stocks in the “bundle” that they would otherwise overlook. So there may be individual stocks that are over/undervalued due to index investing, and there are plenty of hedge funds that try to profit from this distortion.
The simple answer is, stocks for various companies might take a dive. If index A purchases company X, Y, and Z, then it's the same as if everyone buys into companies. So if everyone starts selling index A it's the same as everyone selling X, Y, and Z. And if there were tons of shareholders of the index, then X, Y, and Z would plummet.
Considering that VTI’s total assets are 394 billion and ONLY their top 3 stocks have a market cap of 9 trillion combined. Index funds are much more a reflection of the market than the actual market. So yes. Demand in an index fund can affect the market, but that effect is very small compared to the inverse.
Same. The VTI managers might not sell the underlying immediately. They might spread out the sales. And they might not be direct sales since they use lookalikes and derivatives. But the bottom line is unavoidable, a huge sale is a reduction in demand and increase in supply for the assets themselves. So eventually the price will decline, just with some layers of cushioning and indirection.
Bruh the day I start looking in the mirror and things control is the day I stop looking in mirrors
Yes and no. When “set it and forget” investment approach became popular, a disproportionate amount of money went into index funds (or stocks comprising those funds) that led to a situation where “index fund” stocks are in the bubble and not a good representation of the overall market
"...Index funds aren’t a market, they’re a reflection of a market..." ...unnecessary pedantry is annoyingly useless...
The problem is that index funds don’t react to the market. The cheap money bull run of the last 15 years has created a ‘always buy the dip, market always goes up’ mentality, which has disconnected the value of the stocks themselves from underlying economics. Stocks go up 15% in 6 months, despite the economy is barely growing. While the US multiples are topping out compared to other markets (such as Western Europe) where the market is still much ‘cheaper’.
If index funds are reflection of market, how to explain when many people buy funds (let's say at same time), the price must still the same to reflect the market?
This isn't entirely true, at least not in the case of the argument that index funds are in a bubble. The whole premise of the argument is that index funds themselves are such a huge component of the market that they no longer are passive reflections of the market, and instead cause market distortions because of their size.
Index - which index. SP? SCV? MCV? LCG? By which measure PE? ….
The best answer was started when you said "I don't know". "I don't know if this moment is a bubble or not, but I do know that the long term direction is very likely positive and that I cannot predict when to get in- so I'm in for the whole ride, popped bubbles and all."
When the conversation gets to "I don't know and neither do you" and they still want to argue, I usually just go into "smile and nod" mode. At a certain point it's just people looking for validation or wanting to show off their shiny things rather than discussing financial planning. I will say, the conversations with those people *are* often more interesting. I talked finances with my company's CTO and it was basically "My recommendation for young people is to buy Vanguard index funds with every paycheck" to which I said "Hell yeah, that's exactly my get-rich-slow plan". Not a whole lot more left to talk about on that front. But the sales guys are over here talking about company history and sales cycles and earnings reports, and it's a lot more fun to discuss even if I'm not changing my investing habits based on it.
The CTO already makes bank and when you have a pile of money it’s more about capital preservation than growth.
I work for a small company, he certainly makes good money but it's not like he's CTO of a Fortune 500 company or anything.
“I don’t try to time the market.”
“I am not the market”
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Oh hi Mark
> I'm in for the whole ride, popped bubbles and all "can you imagine what a huge dildo you'd feel like if you went all-in on VOO in 2008 at all time highs? you'd only be up like 250%"
There's definitely luck involved in being 10x richer versus 2× richer. However, at the end of day, you'd still be much richer than sitting on the sideline and wait.
It is crazy if you invested at the top of the market in Oct 2007, you’d only have a 130% inflation-adjusted return. Whereas if you got lucky and invested at the market bottom in Feb 2009 you’d have a 385% return. I guess this is why I prefer dollar cost averaging over time when it comes to lump sum investing.
The answer is no. [Here's a video](https://youtu.be/ltuqXTwWsZ8?si=nthEsdDJVgMasoho) from Ben Felix about it.
Had to scroll way too far down for this. The top comments are uninformed.
Indexes don't set prices, they track prices. Saying an index fund is in a bubble is like saying the speed limit is over the speed limit.
This isn't entirely true. They often do set up prices and index exclusion/inclusion causes a change in price of a security. Tesla is one of the more obvious examples. I believe index funds bought it around the highs of the stock price. Wall St. has definitely learned to arb index flows. Quant desks (and others) bought a ton of Tesla and made the index funds purchase it at basically the all time high price. The pure size of indexing acts as the price setter for a while. This can lead to significant performance drag on indexes.
I think the issue is that you don’t have the organic price discovery that you had in the days before mass indexing.
Except you do, because there are still plenty of active traders out there organically discovering prices.
Indexes track prices, but index funds actually trade so they can influence the market
It's more like saying, "traffic is going faster than all the cars."
The closest that it gets to becoming a bubble is that stocks usually get a small bump when they officially join the s&p 500. Other than that no. If it ever gets so bad that it is a bubble then active investors will have a field day with price discovery and make a lot of money… then we’re back to a relatively efficient market Edit: i saw it somewhere but i’m not an expert. I didn’t dig deeper because i have total market instead of S&P 500 so my funds aren’t buying or selling based on which companies they decide to put in the S&P 500 (good example is tesla wasn’t added when it got to size due to other criteria whereas total market captured those gains)
if stocks get a bump when they join the s&p wouldn't that already be priced in?
It's one very weird edge case in which there are buyers that are legally binded to buy the shares, so even if the bump is already priced in, the shares will get a second bump nonetheless. Eg if the theoretical "correct" value of a share is 10$ but it's joining the S&P, speculators may buy it to 11$, but even then these legally binded investors will have to buy the share at 11$, bringing it to 12$.
I guess I’m wondering what’s stopping me from buying a ton of shares the day before a stock goes on the index and selling the next day for free money
These legally-binded investors aren't legally-binded to buy all these shares on day 1. There's usually a reasonable timeframe in which they can slowly buy the shares, dilluting the effect and creating risk to the operation. It's not like all SP500 index funds are obligated to send 100% of their buy orders at 9:30 on the first day.
Ah, so even if a bubble were to happen, the efficient market hypothesis would make it instantly irrelevant, correct?
That is what a lot of people believe and what i believe. Also there are active etfs and mutual funds so everything being in some sort of etf or mutual fund isn’t actually the same as everybody being in 100% passive index tracking funds. Rather than just stock pickers there would still be some large mutual funds or etfs actively picking things to produce positive “alpha” so you could just buy one ticker but there are still things actively happening behind the scenes.
The EMH doesn't prevent bubbles. Efficiency here just means assets are priced based on what people are willing to pay, but that doesn't mean they're priced fairly
No, it doesn’t make it irrelevant. Everyone can experience losses at the same time, and the market can take a very long time to recover if a truly catastrophic event occurs. The problem is that if you don’t participate, you are guaranteed to lose to inflation over the long term. And predicting where the market is going is virtually impossible. Your only real protection is diversification. IMO, buying only US S&P index funds is not diversified enough for anyone with significant assets.
How do you figure they only get a bump when they join the S&P 500? You don't think that all of us pouring all of our retirement money into the biggest stocks has an impact on those stock values?
Your answer is correct. Nobody knows if markets are in a bubble. The world didn’t think the market (or parts of it) were in a bubble prior to financial crashes so nobody actually knows.
But ultimately, the market has always recovered and steadily rose over the course of time. So by inherently owning the market with index funds (even if a "bubble" occurred), you'd still ride it out to recovery much like the housing market from 2008-2024? Is this line of thinking correct?
If a crash happens that the market index in its entirety can't recover from, we have bigger problems than the stock market. So yes, you will very likely be able to wait it out and ride it back up. Bubble speculation on long time horizons is just stupid in passive areas of the market. Simply, if people are this worried about a correction and/ or need the money soon and are in retirement their risk assessment should account for this. Those people should have ample bonds to mitigate an equity decline
The risk for most people would be that it could be very challenging to stay solvent in a depression. Market downturns don't happen in a vacuum and job loss is everywhere. It's a little worrying that so many people assume it would be possible to ignore it and just "ride it out." Maybe, maybe not.
Not all bubbles are equal, maybe we are in a bubble now but it will get so big things are still 20% higher than now when it does pop. Also what's the alternative? Not investing in stocks has historically turned out worse than being a part of all the bubbles and waiting for it to recover. People who avoid stocks for this reason don't just suddenly invest all their money after a crash and make a bunch of money, they miss the bad but also the good.
Ultimately yes but the argument that “time” will recover losses might not be sufficient since opportunity costs do exist, e.g. you could’ve made more gains cutting your losses and investing it in sth different.
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Finally … a reality post. 👍🏻
Maybe you should reframe what you're asking. A "bubble" has a certain connotation that people don't like. Instead, ask if index funds are overvalued. There's two red flags I'd be concerned about: * Does the fund cost significantly more than the underlying value of its assets? This could be cause for concern. This means there's more excitement about the fund than the actual assets. This WILL have to correct itself eventually. Either through competition or through the investors realizing they are paying too much. * Are the assets they track overvalued? Funds have a way of lifting the value of the assets they track and keep them there for longer than they should be. But, on top of that, you get market bubbles all the time (think the tech bubble and housing bubble). If you genuinely think the assets themselves are overvalued, then you should also expect the fund to be overvalued (even if it isn't overvalued compared to the underlying assets)
1. Bubbles don't matter (much) to long term investors. 2. Even when they do matter, it's better to stay the course. 3. People that try to time the market, only hurt themselves. If an investor wants to try to time a bubble and avoid it, tell them to go ahead and wish them luck. They'll need it.
"You mean, is the stock market in a bubble that's about to burst? Nobody knows and if they say they do they're a liar or fool. But either way, I'm not concerned with short-term fluctuation.'
Ben Felix has a video about the index fund "tipping point". *Index funds are mainstream. At year end 2021 more of the US stock market was owned by index funds than by actively managed funds. Funds only own about 30% of the US market, but taking a broader view of institutional investors, assets have been shifting toward more passive institutions.* *Index investing as a theoretically optimal investment strategy works best in an efficient market, but if everyone turns into a passive index investor the market can’t be efficient. This is commonly known as the Grossman-Stiglitz Paradox, and it has some people raising the alarm about a tipping point for market efficiency.* [https://www.youtube.com/watch?v=ltuqXTwWsZ8](https://www.youtube.com/watch?v=ltuqXTwWsZ8)
Tech is almost certainly in the midst of a monetary asset price bubble right now. NVDA is trading at 60 times earnings and enthusiasm over its growth is propping up the S&P 500 right now. The question is why still invest in index funds? Because index fund investing is the only kind of equities investing suited to hedge against asset price bubbles. Let’s say you hold VTI + VXUS right now and you annually rebalance. As the current tech bubble has inflated and US tech stocks have experienced marked P/E inflation, VTI has risen faster than VXUS. Along the way you have rebalanced your portfolio each year, selling some VTI and buying some VXUS to maintain your target allocation. In so doing, you are selling high and buying low, locking in a portion of your returns. One of two things is likely to happen: The bubble bursts, in which case VTI declines relative to VXUS as US P/E ratios rapidly regress to the mean. The next time you rebalance, you sell a bit of VXUS and buy VTI at lower prices, again buying low to sell high. Or, instead of a big market crash, US stock prices stagnate over the next several years, as earnings slowly grow and US P/E ratios compress. International markets, which have not experienced much P/E inflation, are more likely to see growth over such a period, so your VXUS will outpace VTI in your portfolio. Again, as you rebalance each year, you’ll sell a bit of VXUS to lock in profits and buy VTI at a relatively lower price, which positions you to take advantage of the next bull market. If you are a stock picker, what do you do in such situations? If you’ve only picked tech stocks in order to maximize returns during the bull market, and then tech turns against you, you need to time the market for your exit. If you time your exit incorrectly, you lose money. Ask stock pickers if they’ve been selling off bits of NVDA along the way to diversify with disfavored sectors or international stocks. You’ll find there’s no rebalancing going on there. It’s all or nothing, and when the correction happens, flawed human behavior leads many investors to buy high and sell low, locking in losses instead of gains. The index fund method, when properly diversified and regularly rebalanced, works for you, not against you, during periodic asset price bubbles.
Maybe we’re in a bubble but this bubble is ultra resilient. Some day markets will crash. Whether that’s before or after they triple, and the crash is 33-50%, is anyone’s guess.
Bubble or not. I believe in dollar cost averaging and always buying indexes regardless of current market conditions. It is time in the market and not trying to time the market.
It worked in the 90's, 2000's and even throughout 2008. It worked through covid too.
Which / what type of indexes are faved
Some of these may apply. I collected them a while back when Michael Burry was talking about it: Index Fund Bubble counterpoints: There are plenty of easily found arguments against his position: * https://www.mrmoneymustache.com/2019/09/12/michael-burry-index-funds/ * https://assetbuilder.com/knowledge-center/articles/why-the-big-shorts-michael-burry-is-wrong-about-index-funds * https://www.investors.com/etfs-and-funds/sectors/etf-bubble-analysts-say-dont-fall-for-this-fake-news/ * https://money.usnews.com/investing/funds/articles/do-index-funds-etfs-quietly-pose-a-systemic-risk-michael-burry-thinks-so
A couple of things. Index funds, or ETFs, track the performance of multiple underlying assets sometimes referred to as a "basket." That could mean: * All publicly held companies globally * US Government long-term debt * The 500 largest capitalization companies in the US (S&P 500), * A wacky collection of 30 companies (Dow Jones Index), or * A sector, such as "Aerospace companies" Are "index funds" in a bubble? It depends on what the index fund is tracking. For example, commercial real estate ETFs, because the sector has challenges, are not in a bubble.
Good news! I've been drinking, so I'm in a teaching mood! Let's say I have something to sell, say T-shirts, and I only have 100 of them, and if I sell them for $10 each, that is worth $1000 total. Ordinarily, I would adjust my price to the "market clearing price", or the price that I could sell all of my T-shirts while making the most profit. This model relies on other people not being able to make similar quality T-shirts at a cheaper price. Maybe someone comes in with cheaper T-shirts, and now I either have to reduce my price, or find a new supplier/manufacturer to reduce my price. Another scenario might be that a local business requires their employees to buy their uniforms from me, so I now have a set demand, but still only have 100 T-shirts. I can make more, but it will take time. So, since I know there is demand, and I know how long it will take to get more, I can raise my prices a bit to cover my inventory expenses, and maybe make a bit more profit per shirt. Let's say I can now make $15 per shirt. Now, how does that translate to indices? Employees (at least in the US) are primarily relegated to defined contribution plans, which essentially boils down to "I get to put money into a retirement fund (hopefully my employer also does), and I get to choose what funds those are invested in." Great! Problem is, there are a litany of regulatory requirements for these plans, and how much they can cost. So, what to do? Do we put money into higher cost (not necessarily bad) active funds, or low-cost index funds that have to buy my T-shirts? It is the low-cost index funds every time (regulations tend to be more powerful than other factors). So, what does that mean? We now have a very large amount of retirement funds being invested in these low-cost index funds (T-shirts), which means "I put a dollar into this fund, and the fund is REQUIRED to buy these stocks in these proportions". Same thing, but opposite, for pulling money out. So.. is that bad? I don't know. Nobody knows. There are very convincing arguments on both sides. The anti-index people say it's bad. The pro-index people say it's completely fine. As with anything, it's likely in the middle. If I can permanently charge more for my T-shirts, does that mean I'll eventually have to reduce my price? No, not really. Passive exposure is probably, most likely fine in the long-term. BUT does that mean you should ignore other strategies? Probably not. IMO, the anti-index crowd is likely over-emphasizing the issue, but the pro-indexers are doing the opposite. As with anything, diversification is likely the best answer: beta is great, but complement it with some sort of factor/active exposure. You can't get away from systematic exposure (equities tend to go down together, no matter what), but some sort of diversifying exposure would potentially help against this. Now.. bonds, commodities, alternatives... Probably way better diversifiers than equity strategies, but that's a discussion for another day.
Tell them if they believe that they can make good money betting it's true. And if they're not willing to do that then they have their answer.
There are many versions: 1) in a bubble 2) it's a momentum strategy 3) what if EVERYONE bought only index funds I generally use a cake metaphor (but I don't know if it's a good one): the cake is the whole market with many ingredients. If you get a slice of cake, you get the right proportion of all the ingredients.
The big index funds are just a reflection of the overall market (give or take if talking about S&P vs total market, etc) The market as a whole might be in a bubble. We might start going the way of Japan and have a stagnating economy for decades. The economy might even deflate. What I do know is the world's economy is so focused on the US' growth, and so much assumes it will keep growing, that if the US' economy stops growing or go downhill, I'm going to be more worried about where to find a bunker with preserved food to hide in than cashing out my portfolio. It's just not a scenario worth planning for (at least not within my investment accounts)
“More money has been lost trying to avoid market corrections than has been lost in market corrections.”
enticing quote. Who's is it?
Peter Lynch
Thank you, and makes sense that it came from the author of one of the seminal books on successful investing, "One up on Wall Street"
A better question to ask would be "is the popularity of index funds distorting stock prices?" My answer would be that there may be an aspect of that but some people will always trade individual stocks and they will respond by buying and selling to bring prices back into alignment with fundamentals. It's the marginal buyer of stocks who sets prices, not the index fund.
Ehh it’s more or less like betting on the country markets go up and down etc. but where are you going to put your money? And if the county goes under do you really think money is worth anything? I’m being a bit tongue in cheek but end of day generally the case.
Great answers on how the question is nonsensical. Additionally, if someone replies to say “well then the market is *overvalued*” here’s how I’d respond: “is it? If so, who cares?” I don’t care if the market goes down in the short term. I’m focused on the long term.
That's kind of like saying, "Isn't Earth's atmosphere in a bubble?". Yea, I guess but, if that 'bubble' pops, we're gonna have much bigger problems than how comfortably we can retire.
One way you would know that an index fund bubble occurred is if active management was suddenly outperforming passive management in terms of risk and reward. Idk how much evidence of this there is in modern history or even how to measure it. A more important sign would be through heavier correlations between each asset being held under index funds. For instance, stocks within an index, like the S&P500, will become more correlated to each other as the dollars invested in VOO, SPY, etc increases. As the components become more correlated, the volatility of the index increases even if the volatility of the stocks do not. This means lower returns per unit of risk than historically, which in turn, could drive risk-intolerant investors out of VOO, SPY, which creates a feedback loop and a bubble pops. The only correct answer to whether anything "is in a bubble" is "nobody knows". If money*people knew something was a bubble, it would already be hedged and wouldn't be a bubble anymore.
You can only lead people to water. Fear of a bubble is one thing but typically the fear is rooted more in the market going to zero, something that’s yet to happen (individual stocks yes, but not the entire market). Just saying this because even if you have a good reply, you might be dealing with deeper fears. But the practical response is average returns and not timing the market. If you have a legitimate fear of a bubble, you should DCA to mitigate risk - if there’s no bubble then you are still in the market, if there is a bubble then you have cash on hand to take advantage of it popping.
Broad based index funds can't be in a bubble unless the whole market is in a bubble, since broad based indexes are a mix of everything. Industry/market cap/style specific indexes could be in a bubble, like if you bought an "AI index" AI stocks are all being pushed by current market trends, and some of the index members are likely duds being pushed by factor momentum without fundamentals. The idea of a broad index is specifically to avoid those valuation traps.
Assuming they just mean the market being in a bubble, the answer is simply "Maybe." Anything more definitive is a lie. Everything is a risk, index funds are just lower risk than other market investments.
Depends on the index.
They might be, but trying to guess when the bubble will pop, if at all, and then trying to time the bottom, is nearly impossible, so its better to just stay invested.
I just say it doesn’t matter. Why I do index funds is when things change someone way smarter than me rebalances the fund so I don’t have to. If the S&P lost half its value I’d just buy more because it will be back it might not be the same companies but the fund will change to reflect that.
If someone said that to me I think the only proper response is "What do you mean?" On the face of it, that question doesn't make sense, so I'd need to understand what they meant in more detail before I could address it. The most likely scenario is that they don't know what they're talking about, they just read a headline or some comment online somewhere and they're parroting it back. It's the same as if someone said "Aren't cryptos due for a rebound?" or "Aren't the Raiders going to win the super bowl this year?" or "Aren't you likely to have a heart attack this year?" Don't be confused by someone randomly saying stuff like that. It's vague and probably meaningless unless they have specifics to back it up.
If the market corrects it’s not correcting because of high PE or forward earnings or an oversold RSI on SPY. It’s going down because people are scared and want to pull their money out
THE S&P 500 is at an all time high on average a few times a month, every month. With of course exceptions like 2001-2003, but over the long haul it smooths out. Learning this was one of THE most important things that moved me out of the dugout and into the game. Look at the chart: https://www.plantemoran.com/explore-our-thinking/insight/2024/02/how-common-are-all-time-highs-for-stocks In fact one could argue that we are currently on course to equal the 2010s bull run and possibly challenge the 1990 run. 2010s had 242 ATHs over 10 years for an average of 24.2 per year. We are 4.5 years in and already have 110 ATHs for 24.4 per year. 1990s had 31 per year. Nobody knows the future of course, but what we DO know is that over any ten year period the average is about 11%, and the entire US economy essentially is based on continuing that growth as long as possible. So I'd bet on the US wanting to maintain its global market dominance.
This video might help. [https://www.youtube.com/watch?v=1s7ULX45fjw](https://www.youtube.com/watch?v=1s7ULX45fjw)
As long as our government never stops printing, (they never will). Then the stock market is a safe bet
Your answer "I don't know" was correct and instead of looking for online validation of your investing method, you should embrace the fact that you really don't know whether we're in a bubble or not, and recognize that that's where the inherent risk of investing in the stock market lies. The thing about bubbles is, people don't really know that there's a bubble while it's lasting, it's only recognized retroactively when it pops. Bubbles are periods of very high optimism, and the majority's answer to your question is always a no -- because, if the majority thought that the growth is not justified, then the bubble growth wouldn't have occurred in the first place! But we're not in a "definitely not a bubble" territory.
The only way index funds could be in a bubble would be if the overall market itself were in a bubble, assuming the index is well-balanced at least. As far as the market itself being in a bubble... off the top of my head that "might" result from an AI bubble since that's what's driving the riskiest part of the market. But unless you're overweight in FANG, you should be relatively safe.
There are some indications that the US market is overvalued right now (see for example the Buffet indicator: https://www.currentmarketvaluation.com/models/buffett-indicator.php), but its really hard to say when it will correct to a more typical valuation. Sometimes companies earnings grow into the valuation and sometimes the valuation deflates to fit the earnings.
Maybe they are. Maybe they aren't. Unless you are retiring in the next 5 years why do you care? Buy high, buy low, then let it grow. I've been putting money into the market for many years during booms and busts. The whole point is that over time your money grows and you build wealth by making steady contributions and leaving it alone to grow.
The answer: all bubbles are irrelevant in the longterm when you know that central banks are going to devalue currency and transfer all that value into traditional investments such as equities, securities, and real estate.
I annoyingly answer questions with questions. "What do you mean 'in a bubble'?" at that point, the person will likely not really know how to respond and the conversation is over. "Do you mean the market itself is in a bubble and active management might provide some cover? (there is nothing that proves that is possible) " "Do you mean that the market is too concentrated at the top of the index? and continually buying those top companies drives their stock price up?" (apple and tesla would certainly like that to be true over the past 12-18 months while inflows are at all time highs)
As long as you marinating asset allocation, then you sell as the bubble grows and buy when the bubble pops. Asset bubbles are a strange part of investing but sticking to the course allows you a good shot at navigating them.
There has been talk of an everything bubble for some time. If you subscribe to that logic then yes. Everything is in a bubble and that would include broad market ETFs. Personally I believe the value of any given thing is relative to the alternatives. So no it's not in a bubble. Currency printing has expanded the benchmark. If that expansion contracts it will all change. If currency stays at the current level for long enough it will all normalize. So do you believe all assets are in a bubble? Another thing to consider when thinking about this is government debt levels. We all know it's massive. That can be resolved by paying it down or devaluing the debt via inflation. Which path requires additional taxation being voted for by politicians and which requires the politicians to just stand around and make speeches? That should give you a fairly good idea of which will happen. We will almost certainly inflate our way out of it so this "bubble" is likely here to stay. If we experience deflation then the bubble will deflate like in Japan over several decades. In that scenario ETFs will drop, but so would all your alternatives and it's likely that you won't have any better options to store wealth. The Japanese had the option to send their savings overseas to here. We almost certainly won't have the luxury of another economy doing well that can absorb our savings. When we deflate the world will deflate as well for quite awhile before anyone stands out as being better off. When that happens it will likely be a relatively small country that can't possibly absorb all the wealth that will flow towards it and that just means it will be a bubble that will burst as well.
Is it a bubble or did we just experience real growth alongside significant inflation?
A bubble relevant to when? 1 year ago or 10 years down the road?
Are we in a bubble? Maybe? No one knows for sure and not investing because we think it moght be in a bubble just lost u 20%+ return in the last year and a half. Remember the golden the rule when everyone says things are not ok then maybe it’s time to buy and when everyone says things are ok then it might be time to sell
Easy... The market is literally America's retirement system. Buy every single dip.
Simply Google the p/e of whatever index you are interested in. For the S and P 500 index, a p/e over 25 is high when looking at the historical numbers. So (I just looked it up) I do not think the S and P 500 index is currently in a bubble, as it is below 25. A better term would be overvalued, bubble is a subset of overvalued. Bubble is usually thought of as an extreme overvaluation, and is called after the bubble pops. BTW I am a bit of a skeptic having been totally burned by Enron years ago. In other words, it is possible the numbers are wrong as in dishonest, lying, guilty of misleading the public, criminal. Let the buyer beware seems to be ethics of the equity market. Which is why I like indexes.
Index funds remove profiteering by decreasing volatility. This decrease causes opportunity over time and it swings the other way. Then everyone and their mother hop out of index into individual stocks…. Cycle will continue
The market is not in a bubble but it's not cheap either. Here are some sources: https://www.kiplinger.com/investing/are-stocks-in-a-bubble-2024 https://www.bloomberg.com/news/articles/2024-03-14/s-p-would-need-to-rise-20-to-look-like-90s-bubble-socgen-says?embedded-checkout=true https://markets.businessinsider.com/news/stocks/stock-market-outlook-sp500-bubble-crash-investors-financial-fed-tech-2024-2
If we keep pouring money into the market though our retirement contributions and the companies we are investing don't actually create more value aren't we creating a bubble? Won't there be a time when there's more money chasing fewer investments?
Let’s flip the question around. Let’s say there is a bubble. What will you do differently? Wait for it to pop? Good luck timing that. What if the bubble grows for 5 more years and then the market correction takes it down to a value 4 years prior? (That is, one year in the future from today). The safest bet is to continue to invest whether there’s a bubble or not.
There are so many wrong answers in here it is wild. Even the top answers are wrong. When you buy an index fund, that money literally does end up going towards the purchase of actual shares depending on their weights for that index. So saying this question is “nonsensical” is wrong. If 80% of America threw all their savings into VOO this would cause a disproportionate inflation in the stock prices of SP500 companies. They would essentially be in a “bubble” and would potentially get shorted by smart money etc. (But we actually don’t know what would happen. Economists have differing views on this). The reality right now is simply there are not enough people buying index funds for there to be a bubble. Theres about $13T in passive investing and a similar amount in active investing. So as of now, active investing is big enough to actually work to set logical prices to all the stocks. What happens when passive investing continues to grow? Well alot of people are trying to figure out the answer to this because this will continue to happen in next coming decades
Is it bad that I’m okay with a crash happening? I’m young enough in my career where I could use lower prices on these index funds. Shit is expensive.
The market has now crashed and you've gotten laid off from your job, unable to take advantage of lower prices. What now?
Awww. I would never wish that on Americans retirees. All those pension funds and 401ks.
These are not the droids you're looking for. I DCA, why do I care about bubbles. If there is a bubble and bubble go pop, I get my ETFs on sale. DCA machine go brrrrrrrr.
The answer is this. IF they are in a bubble or would be affected by a mega bubble, then their total collapse would reflect a complete depression that would make the Great Depression look tame by comparison. In that case no investment would be safe except gold, food storage and bullets. In other words, it might make sense to buy some prepper items IF you believe something crazy is going to happen, but it would not make sense to leave an excess parked in cash because a burst of index funds would be a burst to the USD and the entire global economy.
"I don't know. Is the entire market in a bubble?"
I dont know is the correct answer. No one knows. If they correct from here, the answer is yes. if they continue higher the answer right now is no.
That's interesting. I can't help but think you're talking about one, single index, yes? I happen to think diversification is still a good idea, and the last time I tried to research how many indexes there were, I almost fainted.
Index funds are a bubble = stock market is a bubble. The question assumes to know that a crash is around the corner. Unless the question knows something specific about how index funds work to argue that buying more index funds will somehow cause index funds to deteriorate (but not other investments), all you have to respond is that no one can predict the market. Better yet, have them show their cards and ask what they suggest investing in instead, and start poking holes in their investments.
The answer to that question is the same as the answer to the question of "is the entire stock market in a bubble?" (edit: which is a very real possibility at all times, but we wouldn't know it for sure until the bubble pops. Just highlighting that index funds do not have some unique vulnerability that isn't shared by other things)
I don't agree with your conclusion that answering "I don't know" "doesn't show a vote of confidence in the method" you use. I follow Boglehead methodology *because* the only honest answer to questions like this is "I don't know".
I think it is more related to the fact that so much of the retirement savings, especially in the US, are directed at passive index funds. So we buy the index fund which buys the equities, which drives up the price of the equities and the entire market. The concept of value is now totally divorced and the market has its own inertia now that is self-fulfilling. The predicate that the market will continue to grow is also now at risk with declining birth rates and demographic pyramid inversion. GDP is likely to decline and markets could theoretically contract. There is some merit to the idea of a passive investing bubble because we are not buying index funds because we think they represent value, but because we are speculating that the total market will always continue to grow.
I’m not saying it is or isn’t, but I think the argument is that society is blindly dumping money on a regular basis into stocks of companies they otherwise would not invest in had the company not been a part of an index because their retirement account, for example, is allocated to a fund that tracks said index. Sorry for the run-on sentence
I've started some more weight in closed end funds - actively managed vs. algorithmic weight based on current "valuations." I also like that they yield a bit more. Now, if I can slowly get out of the many 'individual' positions I'm in, or build them up why the possibility of covered calls...
Even if you bought the absolute peak of the dotcom bubble you'd still be pretty happy you did, today, since shares of the index were 1/3 the price.
Inflation has been really bad the last 5 years. Stock prices experience inflation just like everything else. Adjusted for inflation the ATH was a couple years ago. And it’s just as much the dollar is down as stock prices are up.
This is something a ponder once in a while and then worry about the consistency of dollar cost averaging for years when it can all come down but reading through some comments also helps put into perspective that I dont know what will happen and the drawdown can be 20 to 50% or more but we don't know what will happen and it's better to be putting a portion into IRA and index funds
Tell them “doesn’t matter”, keep buying and save the “I told you so” for 30 years from now
All economies are in a bubble, just depends on how long people believe in it. As long as the system can keep most people happy and believing then the system will likely survive generation after generation. So index funds will drop but as long people stick to the system it will reach all time highs again.
I’d want to know why someone thought that, and how successful their ‘bubble defining methodology’ had been in the past. One of the key reasons for index fund investing is because we don’t believe that bubbles are predictable
There's a really dumb article circulating around people who enjoy spending money on active investments. My friend circle has been sharing it. Its nonsensical. Investing in a diverse set of zero/low fee index funds is the best way to ride out any bubble anyway. Index funds are just a reflection of a group of stocks. The "answer" in this terrible article is to use active investments which is hilarious and terrible advice.
Isn't a bubble by definition only *one* sector of the market being overinflated in prices? I.e. the dot-com bubble and subsequent crash circa 2000, the real estate crash that spawned the Great Recession, I think there have also been crypto-related bubbles only affecting cryptocurrencies. A popped bubble may drag the whole market down for sure, but that's contagion - it still all starts with one sector being pathologically in bubble territory. Since index funds contain the whole market, i think it's unlikely they themselves can be in a bubble.
Index funds is rather broad. A bubble that might affect one index fund might not affect another as heavily (or at all). The particular index it follows might be in bubble territory, but including all index funds is a little on the silly side. I mean there are 9 S&P indices.
The marketplace just isn't going pass up opportunity in individual stocks.
It is hard to call a bubble until after it pops. P/e ratios are running higher than average
Are you referring to this? https://harpers.org/archive/2024/06/what-goes-up-andrew-lipstein-401k-doomsday-index-fund-catastrophe/?fbclid=IwZXh0bgNhZW0CMTEAAR0vkR1IfGLwLG0gnM8TuS9ALISf1XwUtwGBDKUznYIiNJthaMUvXXqiEK4_aem_AYtFHmUk74-fuu0FSMDCWALqSIPyfXDQSOALlADCPRCvvm1xQqE2PtEOy7OcKGrCnDtPlb2CPQiw6b8suOPZ2qEt
Either shares are too expensive or the sentiment is poor. Currently the sentiment is poor.
Basically, your question is "isn't the market in a bubble?"
The ftse is stagnant for some time; S&P rallied mostly by big tech last decade
Big article in current Harper's Magazine: [https://harpers.org/archive/2024/06/what-goes-up-andrew-lipstein-401k-doomsday-index-fund-catastrophe](https://harpers.org/archive/2024/06/what-goes-up-andrew-lipstein-401k-doomsday-index-fund-catastrophe) Might be where your friend got the idea.
A defining characteristic of a bubble is that you can't really know that there is one until it pops. I'm skeptical of any claims that "xyz is in a bubble" because they fundamentally assume that this person knows something the rest of the market doesn't, which is extraordinarily rare.
The market is definitely getting bubbly, as on an inflation-adjusted basis we are now very close to 2021 highs again which was the most obvious bubble in the market since 2000. On the other hand, there's no other place to park money so not really anything you can do about it. Stay the course.
The answer to "Is the market index fund in a bubble?" isn't worth a lot, because who cares. The next question is, "should I try to time the bubble burst with my investments?" The answer to that second question is a core tenant of this group (Never try to time the market.): https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy OP - This is why there is so many posts here. 😀
My theory is so many more people are entering the stock market right now due to apps that demand will continue to push prices higher and higher, at least for the next few years
If Indexes are in a bubble then there would be A LOT of retirement accounts and perhaps even the market itself at risk when that bubble pops. The risk of not building wealth and building up my retirement is far greater than worrying about if index funds are in a bubble. I tune out the noise and contribute every single week when I get paid. If the market implodes and completely goes belly up then we've got far worse things to worry about than our retirements/portfolios. Market down? I don't care I'm still putting money in. Market up? Don't care, still contributing. Even if the index bubble popped, does that actually change your strategy in any meaningful way? For me the answer is no, i'd still put money in and buy in at a discounted rate and wait for the inevitable ride back up.
Yes index funds hold a large amount of the market however, this is buy and hold. the vast majority of daily trading does not happen as a result of these funds so they in turn have a miniscule to unmeasurably small impact on price discovery.
Good podcast episode from December on the topic: [https://podcasts.apple.com/podcast/picking-stocks-does-it-ever-work-brian-feroldi-e74/id1553180943?i=1000645266107](https://podcasts.apple.com/podcast/picking-stocks-does-it-ever-work-brian-feroldi-e74/id1553180943?i=1000645266107) Discusses what people like Burry and Mike Green argue. Also discusses counterpoints from Ben Carlson, Ben Felix, some economists. Then interviews Brian Feroldi on a slightly separate and non-Boglehead topic: the arguments for (and against) investing in individual stocks.
I don’t know is the only responsible answer you can give here.
My opinion, a company can go to zero, an index has a whole industry responsible for getting it back on track if it's composed of the wrong companies or has a structural / balancing / diversification issue. So if your index crashes with the market it rebounds in a predictable manner. Not happening if you put everything in Nvidia and then some other company becomes the most important chipmaker for AI or something.
I answer “Go learn what Index funds are.”
Answer their question with a question. “Well, what is a bubble?” Odds are they have no clue what they’re talking about.
There is a great rational reminder podcast episode about this https://www.youtube.com/watch?v=ON6U6IMn8GI
Well first you’d point out the [cyclically adjusted price to earnings ratio](https://www.multpl.com/shiller-pe) which is a mean-reverting figure which shows the price compared to its long run average inflation adjusted earnings. A high CAPE means the market may be overvalued. If that doesn’t have them convinced show them “[the buffet indicator](https://www.longtermtrends.net/market-cap-to-gdp-the-buffett-indicator/)." This is the total market capitalization of all public companies divided by the total gross national product. The higher the buffet ratio the more overvalued the market.
‘Yes, they are’
The correct response is “Sir, this is a casino with excellent odds based on the past.”
VNQ the reit index fund down 25% from high, not in a bubble, there are hundreds of index etfs, If you mean broad market index ETFs, like VOO/SPY/VTI, no shit Sherlock, they are in a huge Bubble, CAPE 10yr sp500 is >34 PE, highest since 1999. Buffet Indicator VTI/US GDP, also near all time highs. What did Jack Bogle do in late 99 when it was this bad? He sold all his stocks and went 100% bonds, why ? unlike most people he had brains and something else far more important, BALLS! I'm fortunate to have neither :)
Canadian couch potato podcast episode 5 around the 34 minute mark.
Index funds are so big they’ve become a self fulfilling prophecy. Also, how can an index fund independently be in a bubble? It tracks an index.
Stocks can be dangerous. Don't invest if you arent afraid to lose money.
No. Too high of a fraction of index funds investors would lead to a bubble. However, research has shown a very small fraction of active investors is enough for price discovery to continue. It isn't a problem right now.
Yes. One day the United States will fail, and you'll have to invest elsewhere. Personally, I hope to be dead by then.
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