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From the more than a few anecdotal stories I have heard, it seems hiring a Merrill Lynch advisor is the best way to destroy wealth. Not sure what they drink in their water coolers over there.
These kinds of commission based brokers and advisors are on their way to extinction even without Vanguard anyway.
I was thinking what would happen if indexing popularity increases to the point where most of the investing is in index funds. Would it actually increase volatility due to reduced effective float? I know this is not going to happen, but it would be interesting if increase in percent investment in index funds beyond a certain percentage correlates with increase in volatility. Just some Friday afternoon ramblings...
Reply to @Kaspa: An interesting thought experiment. Don't think volatility would be any different unless most people also did a buy and hold which is often lumped with indexing but a separate issue.
The stocks within the index would become highly correlated and move up or down together. We have already seen this with major indices. The P/E inequality between stocks in an index and one that isn't will start to grow as most money starts flowing to indices. But it is this very thing that will destroy the use of indices as there is more money to be made arbitraging between the two. Either people will start creating niche and slice indices that will grow in number to cover almost every stock in some index which would make the concept of indexing moot or individual stock picking will become more popular as money can be made just throwing darts at the stocks not in an index with that inequality which will destroy the premise.
Combining indexing with a forced buy and hold (say with a punitive transaction cost) will have more disastrous consequences as price discovery collapses and indexed will move up and down based on net flows in or out rather than company performance.
Note that all of the above happens to some extent right now but exists in a loose equilibrium based on exploiting inefficiencies that will preclude such thought experiments becoming real.
Comments
These kinds of commission based brokers and advisors are on their way to extinction even without Vanguard anyway.
The stocks within the index would become highly correlated and move up or down together. We have already seen this with major indices. The P/E inequality between stocks in an index and one that isn't will start to grow as most money starts flowing to indices. But it is this very thing that will destroy the use of indices as there is more money to be made arbitraging between the two. Either people will start creating niche and slice indices that will grow in number to cover almost every stock in some index which would make the concept of indexing moot or individual stock picking will become more popular as money can be made just throwing darts at the stocks not in an index with that inequality which will destroy the premise.
Combining indexing with a forced buy and hold (say with a punitive transaction cost) will have more disastrous consequences as price discovery collapses and indexed will move up and down based on net flows in or out rather than company performance.
Note that all of the above happens to some extent right now but exists in a loose equilibrium based on exploiting inefficiencies that will preclude such thought experiments becoming real.