Vanguard, BlackRock, State Street like Self-Driving Cars

By TopMicrobialStock @ Adobe Stock

Are you paying attention to the trillions and trillions of dollars tied up in passive index funds mainly between the big three money managers: Vanguard, BlackRock, and State Street? Investors send money to these behemoths through 401(k)s, target date funds, and managed accounts like they’re riding in a self-driving car on autopilot. No thought whatsoever about what’s coming down the road.

There’s no analysis by the firms. There’s no push back to consider another option. The money comes in and they indiscriminately buy more of the same stuff. What happens when prices turn down like they always seem to do and the buying turns to selling?

Everyone’s a buyer in a momentum driven up-market. What happens when all this buying from Baby Boomers, for example, turns to selling to fund their retirements? You’ve heard about the pig-in-the-python and the power this group has had over markets. But once it’s digested, what’s the catalyst to move markets higher? You know the lack of savings by the next generations. How will they fill the void?

Look at the composition of the index, the S&P 500—a market cap weighted index. The largest stocks by size carry the most weight—a formula based on price. In other words, it’s a measurement based on emotions (prices). It’s not calculated based on dividend yield, something retirees may crave to help pay for their ever increasing (inflation) bills down the road. Prices are based on emotions, and emotions have a way of changing.

With a balanced approach that’s not passive or on autopilot you aren’t simply throwing money at an index. You construct a portfolio based on an eclectic selection of securities that may be driven by metrics other than market cap or prices. It’s why I like consolidating assets with Fidelity Investments and using their platform to construct portfolios that fit your needs, not just passively throwing money at an index.

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Originally posted on Your Survival Guy.