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Planet Money Newsletter: Index Fund Questions
Posted on 10/8/19 at 12:50 pm
Posted on 10/8/19 at 12:50 pm
To preface this, I am in my early 30's and far from a recession alarmist. I subscribe to the theory that with a 25-30 year horizon, my best option is to continue to DCA as much as possible into tax-advantaged retirement accounts and invest in broad market index funds. As such my largest holding by far is VTSAX.
I listen to the NPR Planet Money podcast regularly and enjoy it more for its entertainment value, but I found the newsletter today intriguing. I personally hadn't thought like this before, so I'm just wondering what other folks thoughts are about it...
LINK - Planet Money's Newsletter: Is Your Retirement Fund Ruining Our Economy?
LINK - Original Bloomberg Article
I listen to the NPR Planet Money podcast regularly and enjoy it more for its entertainment value, but I found the newsletter today intriguing. I personally hadn't thought like this before, so I'm just wondering what other folks thoughts are about it...
quote:
Burry recently told Bloomberg that he sees another massive bubble happening. This time, he says, it's in index funds...
Actively buying and selling stocks and bonds provides a service to the market: It's called "price discovery." If something is overvalued, traders sell it. If it's undervalued, they buy it. That moves the price of the asset, and it is the crucial mechanism to make sure the price is right, signaling its true value.
But index funds don't really discover prices. Investors just dump money into these investments, which mindlessly hold stock in companies whether they're doing well or not. Burry believes the fall of active buying and selling has led to overvaluations, and he's predicting a crash in the value of the large companies held in index funds. "I just don't know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be," he told Bloomberg. He's now investing in small companies, which he says are often ignored by index funds...
"In this Giant Three scenario, three investment managers would largely dominate shareholder voting in practically all significant U.S. companies that do not have a controlling shareholder," Bebchuk and Hirst warn. They fear this could have drastic implications for corporate governance and competition...
LINK - Planet Money's Newsletter: Is Your Retirement Fund Ruining Our Economy?
LINK - Original Bloomberg Article
Posted on 10/8/19 at 1:14 pm to kennypowers816
Posted on 10/8/19 at 2:01 pm to kennypowers816
i've read several articles about this. The theory has some logic to it but lets take a look at PE (price to earnings) ratios for the top S&P 500 stocks
1. MSFT 27.00
2. AAPL 19.28
3. AMZN 71.23
SP mean is 21.68
These 3 companies make up 10% of the entire index. 21 is historically above average but over the last 30 years it is about average. I think a lot of that has to do with tech stocks trading at much larger multiples of earnings. In otherwords something has to be bringing down the PE ratio of the S&P down to where it is which IMO suggest that currently price discovery isn't an issue. I could see it being an issue 5 years from now, but markets always have a way of correcting. Diversifying investments helps, like property, storage units, preferred stock, bonds, REITS, UIT's, and even commodities.
There are lots of ways to make money.
1. MSFT 27.00
2. AAPL 19.28
3. AMZN 71.23
SP mean is 21.68
These 3 companies make up 10% of the entire index. 21 is historically above average but over the last 30 years it is about average. I think a lot of that has to do with tech stocks trading at much larger multiples of earnings. In otherwords something has to be bringing down the PE ratio of the S&P down to where it is which IMO suggest that currently price discovery isn't an issue. I could see it being an issue 5 years from now, but markets always have a way of correcting. Diversifying investments helps, like property, storage units, preferred stock, bonds, REITS, UIT's, and even commodities.
There are lots of ways to make money.
This post was edited on 10/8/19 at 2:03 pm
Posted on 10/8/19 at 3:38 pm to kennypowers816
I don’t see a crash for most major funds happening unless the overall economy tanks. If the biggest companies stocks crash, the whole economy is probably crashing as well.
Posted on 10/8/19 at 4:07 pm to Cycledude
quote:
I don’t see a crash for most major funds happening unless the overall economy tanks. If the biggest companies stocks crash, the whole economy is probably crashing as well.
then we are all in this together
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