Ok, so I thought I posted this on Friday… but apparently it didn’t auto-publish. So it’s Finance Fridays on Monday!

Hey everyone, it’s Finance Fridays again. Today will just be a short post about “Bogle’s Warning“.

Stock Photo from: Pexel

Bogle’s Warning?

Yea.

Bogle, as in John Bogle, the founder of Vanguard, and the figurehead of the “Boglehead” movement.

I would recommend you read the full article here on the Wall Street Journal. But if you’re lazy, you can probably glean most of it from rest of my post.

The gist of it is that more and more people are utilizing index funds over the last 3 decades. At some point, this may reach a mark of 50%. I alluded to this a little in my previous post Could Index Funds Be Bad? However, this article takes it a step further in that if index funds are about 50% of all assets, then the “big three” of index funds, which are Vanguard (51%), Black Rock (21%), and State Street Global (9%) will effectively own more than 30% of stock market.

The article goes on to talk about what that could mean and various methods to prevent it from happening or the creation of safeguards needed.

One thing that I agree with is that this problem is unlikely to go away.

Indexing works and has been proven to work very well, over long arcs of time. It just makes sense for more and more of the masses to “get it”.

To be honest, I’m not quite sure how to fix this “problem” of index funds getting too big. The article postulates various potential solutions to this likely inevitable problem. However, I don’t think any single of them would be enough. Most likely it would require multiple different solutions.

So then what… is the sky falling?

Nah.

Index funds aren’t going anywhere. However, it does remain to be seen how these potential problems will be solved. The ideal solution in my opinion would be to have more mutual funds enter the market to divvy up the power some more. Or, for the big dog, Vanguard to spin off into smaller entities. However, I don’t see either of these things happening.

The more likely solution will be a combination of federal regulation, transparency, and explicit fiduciary duty with penalties in place. Long story short is that it’s not a problem until it’s a problem, and by then it may be too late. However, I would imagine that wheels are now turning in the background to prepare for these problems.

Basically, I don’t foresee this being a problem for at least 10 years, and by then I would imagine the index fund landscape will have changed to match it. That said, someone like Bogle has the foresight to see these problems before they arise which is why he is bringing them to our attention.

Anything else?

Yea.

Don’t forget to make changes to your 401k/403b contributions for next year… as I’ve said before the new limit is $19k, adjust accordingly.

Also, have a good weekend. Holiday time can be stressful, eat some good food and keep some good company. Life is short. Be happy.

TL;DR

Bogle raises warning about index funds getting “too big”. When Bogle talks, I listen.

This may be a problem in 10 years or so, in my opinion. However, I think safeguards will be in place before this happens.

Index funds aren’t going anywhere.

Adjust your 2019 contributions for $19k.

Have a good weekend. Life is short. Be Happy.

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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