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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pottertheotter 36 minutes ago | parent | next [-]

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.

	▲	asdff 13 minutes ago \| parent [-]
		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.

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majormajor an hour ago | parent | prev | next [-]

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).

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Leif24 an hour ago | parent | prev [-]

> 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?