walleke

The End of Asset Allocation

A related idea concerns efficiency of markets and index funds. In an efficient market you "get what you pay for". Efficiency of markets depends on independent rational investors. When there are many such investors the market is efficient. A few can piggyback on an efficient market by buying index funds, ETFs and the like. This gives diversification at low cost. But index funds are not independent rational investors. As more and more people invest in index funds the market becomes less efficient, and the rationale for index funds disappears.