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You hear that often, but if you squint your eyes, the entire idea of index funds is just that: they outperformed stock-pickers in the past, so you should put money into them to get higher returns in the future. There's no fundamental index fund investment thesis other than "past performance is indicative of future returns".

That thesis is at least to some extent self-fulfilling, because there's so much money flowing into index funds that prices of all the underlying assets keep moving up, and there's probably not enough money trying to bid against that / arbitrage the excesses away.

A similar thing could happen with AI. Markets are efficient only if the world isn't in some sort of a trance.

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That's not the idea behind index funds. It's arithmetic. The aggregate return of active investors, before fees, is the market return. Once you subtract fees, it's below the market return. While some active managers' performance less fees is higher than the market return, it's very difficult to predict which will perform this way. So your best bet is to own the market through a broad index fund that has almost no cost.

If you want to read about this, see Sharpe (1991), The Arithmetic of Active Management.

In a spherical cow sense sure. But no one is buying the market return when they buy even a total market index fund. Other commenter is right, they are expecting past performance of these index funds to be indicative of future returns. But then again they aren't really actively investing either. Automatic contributions pervert a lot of the efficient market hypothesis ideas I think since these people are buying, routinely, maybe as long as they are alive, with no information in front of them.

I've always wondered what happens as we approach a structural event, such as peak population, that reduces this positive pressure.

You brought a real economy issue to a finance economy discussion.

One of the hottest questions, yes! ++1

And its not that discussed,as Id say: What happens if the number of people interested in buying ETF are shrinking in numbers?

For sure, the liquidity will stay out there - somewhere, somehow. But what impact on stock/index prices?

Boomers now retiring, in most western countries this is the biggest cohort of all time - what happens if they want cash for stocks?

> So your best bet is to own the market through a broad index fund that has almost no cost.

There's also the fact that index funds have de facto become pension funds in most of the Western world, so Western politicians are trying to do their damn best to keep the stock exchanges afloat (i.e. always going up) in order to keep those aged 45-50 and older on their side when it comes to voting. We've last had a market crash in 2008-2009 (the covid thing was just a blip), I don't see today's politicians allowing a crash like that to happen if they can help it.

So in fact putting one's money into index funds is betting on the current political system continuing doing its thing, no need to involve any advanced maths.

I don't think that's a particularly accurate assessment of the idea behind index funds.

The point of index funds isn't "these outperform all pickers, so they'll outperform all pickers in the future."

I think the idea is more around a combination of:

- you'll have much lower risk trying not to pick the right picker (or pick the investments yourself)

- the median picker is probably not very good (approached in two directions: sizable pickers that hit on an edge will likely be copied until the edge is gone, and smaller pickers are extremely unlikely to have enough specialized info or skills to excel).

> you should put money into them to get higher returns in the future.

Higher returns than what? I thought the whole point of buying broad market index funds was to simply get the market returns. For this thesis to make sense, you simply must assume that companies, in aggregate, make money - not that any particular company will follow past performance. If you don't think companies make money, then what are you doing buying equities?

> There's no fundamental index fund investment thesis other than "past performance is indicative of future returns".

(Not a finance guy) But isn’t it that buy and hold index funds minimise trading fees, and those savings compound to produce better long term performance than nearly all active funds?

(The “Acquired” podcast episode covering the history of Vanguard and Jack Bogle goes into it in detail)

No, the investment thesis is that there is a risk premia associated with investing in equity (as opposed to cash) that you will be compensated for - if this risk premia exists the way to harvest it is to be as diversified as possible (hand waving).

The relative performance of different baskets of equity is of course much more subtle / prone to behavioural effects and so on.

The stocks in the index funds are picked, just by a committee. And there are a few competing index funds.

They're picked (mostly) using very mechanical rules though so e.g. hedge funds actively speculate on which stocks will be added to the index

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