In an interview I recently read, Buffet discusses how all the great crashes rode on the coat-tails of "sound premises". From the dot com crash (with the assumption that everything becomes better and more efficient through the internet) to the housing crash of '08 (with the assumption that real estate always increases in value so it's always good to own as much as you can).
The idea crossed my mind about the "safety" of index funds as another possibility of a "sound premise", by which people attempt to avoid as much risk and fees as possible while harvesting returns that mirror the market average. It has become almost dogma in financial independence and personal finance subreddits and individual blogs that index funding is the way for the middle-class to make long-term investments safely, while incurring much lower risk and fees when compared to actively managed funds or having a financial advisor.
My question is: Is there a point where the "sound premise" of the index fund investment becomes dangerous? As one example, what happens if a majority of investments are thrown into index funds. The proportion of total funds invested in index funds has already increased greatly since the late '90s. Can their popularity and low-risk, low-cost appeal become a problem for the market? Would this be a short-term problem that wouldn't matter to long-term index investors to begin with?
Submitted September 14, 2018 at 06:24PM by ashywenis https://ift.tt/2Qwtp4c
