The Index Fund "Tipping Point" (EP.225)
The Rational Reminder Podcast
Market Efficiency Improves if Informed Active Investors Switch to Indexing
In equilibrium, investors combine what they deem to be the tangency portfolio with risk free borrowing or lending. The paper shows that if misinformed and uninformed active investors who make prices less efficient by trading, switch to market cap indexing, market efficiency actually improves. If you've got a bunch of misinformed active managers, there's a pretty good chance the market portfolio is actually sub optimal.
Are index funds a menace to the market? Are pension funds still a wise way to secure your financial future? In this episode, we discuss index funds, the state-sponsored pension plan in Canada, and much more. First, we unpack the nuances of index funds and take a look at the impact that active and passive investors have on the market. We discuss current index fund trends, when to switch from a passive to an active investor, and the dreaded index fund tipping point. To help us understand pension funds, we also chat with Jordan Tarasoff, a financial planner at PWL Capital, about the recent controversy regarding state pension schemes in Canada, and he provides us with some valuable insights into the government’s upcoming plan. We switch up our usual book review to celebrate Financial Literacy Month and share five recommended books that will help you improve your understanding of finance. We also try something new by giving listeners a condensed overview of a previous episode with one of our favourite guests, Scott Rieckens. Finally, we go through some of the feedback and comments we’ve received from the growing Rational Reminder community about the show and our recent financial goals survey.
Key Points From This Episode:
- What to look forward to in next week’s episode. (0:05:08)
- Hear about a special promotion to celebrate Financial Literacy Month. (0:05:43)
- Introducing today’s topic and what to expect in the episode. (0:05:56)
- Worries and biggest critiques of index funds. (0:08:23)
- Current trends regarding index funds in relation to the market. (0:09:40)
- When investors should switch from passive to active. (0:12:45)
- Some good news about the index fund tipping point. (0:15:46)
- What investors should be aware of when actively investing. (0:16:32)
- How informed and misinformed managers contribute to the index fund tipping point. (0:19:38)
- Who the investors and managers are that change to passive investment. (0:20:52)
- How switching from active to passive investing affects the value of the market. (0:25:38)
- Unpacking the concept of markets being ‘inelastic’ as a result of index funds. (0:28:52)
- Whether passive investing undermines price efficiency concerning index funds. (0:30:03)
- What would cause the index tipping point to occur. (0:31:40)
- A brief background on today’s guest, Jordan Tarasoff. (0:35:00)
- Details about the Canada Pension Plan (CPP) and how it works. (0:35:28)
- Jordan outlines the benefits of deferring a pension plan claim. (0:36:28)
- Recent changes that make deferring your pension plan non-beneficial. (0:38:20)
- What age group the recent pension plan changes impact the most. (0:42:14)
- Why the Consumer Price Index (CPI) can’t be used to predict wage growth. (0:43:53)
- How Jordan is approaching his clients’ pensions regarding the new changes. (0:45:10)
- Review of our top five books for increasing financial literacy. (0:48:57)
- Our new segment: summarizing a past episode in sixty seconds. (0:56:57)
- We ‘talk cents’ about financial values and spending. (0:58:49)
- Recent reviews and feedback received about the podcast and goals survey. (1:02:40)
Links From Today’s Episode:
Jordan Tarasoff — https://www.pwlcapital.com/profile/jordan-tarasoff/
Scott Rieckens — http://www.scottrieckens.com/
Efficient Frontier — http://efficientfrontier.com/ef/0adhoc/2books.htm
Episode 95: Scott Rieckens (Playing with FIRE): Finding Financial Education, Perspective, and Freedom — https://rationalreminder.ca/podcast/95
Episode 99: Andrew Hallam (Millionaire Teacher): How to be Wealthy (and Happy) — https://rationalreminder.ca/podcast/99
Episode 108: Dr. William Bernstein: Praying for a Bear Market — https://rationalreminder.ca/podcast/108
Episode 128: Morgan Housel: The Psychology of Money — https://rationalreminder.ca/podcast/128
Episode 159: Bill Schultheis: Build Wealth and Get on With Your Life — https://rationalreminder.ca/podcast/159
Episode 186: Andrew Hallam: Balancing Money, Relationships, Health, and Purpose — https://rationalreminder.ca/podcast/186
Episode 191: Emerging Markets: Diversifying Asset or a Reverse Lottery? (plus Reading Habits w/ Morgan Housel) — https://rationalreminder.ca/podcast/191
Episode 212: Prof. Ralph Koijen: Demand System Asset Pricing & Inelastic Markets — https://rationalreminder.ca/podcast/212
Episode 124: Prof. Lubos Pastor: Equilibrium Models vs. Intuition — https://rationalreminder.ca/podcast/124
Episode 220: Jonathan Berk and Jules van Binsbergen: The Arithmetic of Active Management, Revisited — https://rationalreminder.ca/podcast/220
‘On the Size of the Active Management Industry’ — https://www.jstor.org/stable/10.1086/667987
‘Disagreement, tastes, and asset prices’ — https://www.sciencedirect.com/science/article/abs/pii/S0304405X06001954
‘Measuring skill in the mutual fund industry’ — https://www.sciencedirect.com/science/article/abs/pii/S0304405X15000628
‘Which Investors Matter for Equity Valuations and Expected Returns?’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3378340
Balance: How to Invest and Spend for Happiness, Health, and Wealth — https://www.amazon.com/Balance-Invest-Happiness-Health-Wealth/dp/1774580756
If You Can: How Millennials Can Get Rich Slowly — https://www.amazon.com/If-You-Can-Millennials-Slowly/dp/098878033X
The Coffeehouse Investor's Ground Rules — https://www.amazon.com/Coffeehouse-Investors-Ground-Rules-Happiness/dp/1119717086
The Psychology of Money — https://www.amazon.com/Psychology-Money-Timeless-lessons-happiness/dp/0857197681
Think, Act, and Invest Like Warren Buffett — https://www.amazon.com/Think-Invest-Like-Warren-Buffett/
The November Meet-up Email — info@rationalreminder.ca
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/?hl=en
Rational Reminder on YouTube — https://www.youtube.com/channel/ Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on Twitter — https://twitter.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/
Cameron on Twitter — https://twitter.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
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