Public equity markets are in many ways a sophisticated game of pump-and-dump. Your stocks soared in 1996-1999, then crashed in 2000. They soared again in 2002-2007, then crashed in 2008. They’re soaring again now.
Guess what comes next?
For the most part, wealth managers are more interested in their wealth than yours. All kinds of fees and commissions are designed to separate you from your money. When markets turn with a vengeance, you’re the one left holding the bag.
Think passive investing and indexing are the answer?
Guess again. Active managers do difficult work in research, asset allocation, capital commitment, and price discovery. Active investors are a beast of burden like an elephant.
Passive investors, including ETFs, are like parasites on the back of the elephant. A few parasites do just fine, and the elephant doesn’t notice at first. Eventually there are so many parasites that the elephant dies, and the parasites die too.
Today, passive investors make up more than 50% of total assets under management. The parasites are winning. When markets correct, passive investors are like deer in the headlights – they can’t short or go to cash. They have to ride the index down.
This post was published at Wall Street Examiner on June 23, 2017.