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Indexing Bubble? Don’t Run and Hide

[/fusion_text][fusion_text]There is a familiar tale these days among old school money managers. They say the rise of index investing is causing a bubble in the stock market because people are just blindly buying everything. It is making prices of stocks rise artificially high, and spells impending doom for the stock market. Conveniently the solution is to invest with the aforementioned money managers because they can time when to be in or out of the stock market and they can pick the best stocks to invest in.

It is possible that we could be seeing an indexing bubble in large cap U.S. stocks. I’m not convinced that indexing has grown to the level where it is causing a bubble, but let’s say it has for arguments sake. In order for that to be a problem, a large percentage of the new adopters of index investing would have to abandon the strategy in order for the bubble to burst. That sounds even less likely to me, but still possible.

What would we do to prepare for such an event? Surely we wouldn’t actually give up on indexing and pay someone to time the market and pick stocks. Study after study shows that very few win at that game.

Instead we can simply own more funds than just an S&P 500 Index fund. Diversify your indexes. Add a small cap index. Add a value index. Do the same thing with international index funds. Or, even better, you can buy funds that take the good parts of indexing (low costs, low taxes, and low individual company risk) without being forced to mimic the precise percentages of the index. All of those ideas will insulate you from an indexing bubble, if there ever is one. That’s what we do.[/fusion_text][separator style_type=”single” top_margin=”” bottom_margin=”” sep_color=”” icon=”” width=”” class=”” id=””][fusion_text]

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. ASA gathers its data from sources it considers reliable. However, ASA makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.