When Mr. John Bogle floated the idea of passive investment in indices, it was a novelty. But now after couple of decades in existence and raft of index linked funds, it is common. And when something becomes too common and ubiquitous in trading, history says it is about to become dangerous. Much touted SIP ( Systematic Investment Plans ) are very beneficial in long term and it surely helps majority of investors who don't have enough time and technical ability to handle their own investments. But when every neighbour and his dog does the same then how the market will react going forward is something needs to be thought about.
It is a simple fact that If everybody is buying the same product then its price won't go down. Short sellers who used to keep small bubbles in check have been massacred en masse. It's like getting rid of all the carnivorous species from the forest and then complaining about rapid rise in the population of herbivorous. Recent experiments by central bankers ( mostly theoretical experts and practically dumb Ph.D in Economics fellows -- otherwise who invents negative interest rates ! -- much on that in later posts ;) ) has created the artificial markets distant from reality. In doing so, they are doing much harm to the common investor or public in general rather than helping. If they don't know it now, they will know it later when someone else does Ph.D on such effects later ;)
Who will be rewarded in future ?
Investors in SIP or Passive Index Funds etc got rewarded greatly because they stuck to something unproven before. They weathered the storms during the market crash and followed the game plan. They were the minority with nerves or smart enough to believe in long term capital market gains. But now things may change. So now what if instead of getting blockbuster 10/20/30 fold return on your investment, you are just going to get paltry 1 or 2 % return with huge downside risk if things starts crumbling and crashed indices never some back to this level again until next 15 years !
Is the idea of allocating money to passive investment for big gains in later life dead? Well, maybe not. But it looks like the returns will be much more suppressed than what smart active investors can achieve. Innovation in portfolio management is needed. Now instead of just buying and holding stocks, you may need to do covered calls or some sort of other active trading. Instead of constantly allocating and investing money every month, you may need to wait for some trading opportunity in good investment to buy it in bulk during downturn at discount.
In short, following the herd will never take someone ahead. Today's radical idea will be tomorrows banal thought. So the one who will upgrade will definitely be ahead. As usual, patience will be rewarded in the markets :)