[electrograv]

The thing is, you can simultaneously be completely correct about the market being insane, while also entirely wrong in expecting it to behave in a sane way.

Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”

I have a vague theory that as the amount of wealth inequality increases in a system along with “money printing” (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general. In such a case, an increasing majority of the money circulating has no need to be grounded in anything close to the common basic needs and values that most normal people have to live with.

Instead, most important to such wealth is to tap into the source of inflation to be on the winning side of that. This becomes a game of its own, where an investment’s connection to reality or fundamental value is mostly irrelevant compared to how it leverages or monopolizes the state-created and privately created instruments of “money printing” (sketchy lending, rehypothecation, etc.) and other such “games” that only the wealthy are allowed in on.

[throw0101a]

> Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”

It's not necessarily about things being (ir)rational, but about 'psychology' and the multi-player system that is The Market™. Because it's all very well and good to buy and sell individual products (securities) on their merits, but one also has to take into account what other people's ideas on them is as well (as you are buying/selling from them).

This factor has been known about for almost a century:

> A Keynesian beauty contest is a beauty contest in which judges are rewarded for selecting the most popular faces among all judges, rather than those they may personally find the most attractive. This idea is often applied in financial markets, whereby investors could profit more by buying whichever stocks they think other investors will buy, rather than the stocks that have fundamentally the best value, because when other people buy a stock, they bid up the price, allowing an earlier investor to cash out with a profit, regardless of whether the price increases are supported by its fundamentals and theoretical arguments.

* https://en.wikipedia.org/wiki/Keynesian_beauty_contest

Of course other people know about this factor, so folks are judging others based on how they are judging others.

(Personally I'm just going with index finds (VEQT/XEQT/VBAL up here in Canada).)

[bryanlarsen]

Index funds won't necessarily save you. 7.5% of the S&P 500 is NVidia, 7% is Microsoft, etc. Almost 40% of the S&P 500 is in the top 10 stocks, and of the top 10, only #9 Berkshire Hathaway is not big into AI.

[arduanika]

Index funds aren't supposed to save you from a market setback. In a correction or crash, you will lose money. They merely save you from the total ruin that can come with leverage, or from thinking you can outplay the stocks or options market as an amateur.

I'm glad to see OP's comment voted to the top, b/c it models good thinking. He knows what he doesn't know, and so he sticks to index funds.

Also -- I don't know anybody who still buys S&P 500 funds, now that there are broader funds available. None of the funds for Canadians that GP listed is limited to the S&P 500, so it's unclear why you would respond as if that's the index he's talking about.

[bryanlarsen]

The OP still has the same basic problem.

- he's overweighted on Canada. Being Canadian themselves, that's a double risk. If Canada does poorly, the chance of his livelihood being affected is high. Investments should be anti-correlated from livelihood risks.

- despite being 30% in Canada, VEQT has 2.5% in NVDA. By itself that's fine, but once you add similar amounts for MSFT, GOOG, META, AAPL, BCOM, etc, it becomes a significant portion of the index.

The point of an index fund is to be diversified. If one sector crashes but other sectors do well you're still fine. The OP will lose significant money if either Canada or AI crashes, even if the rest of the world is doing well.

[throw0101a]

The Canadian funds like VEQT/XBAL/etc are overly concentrated in Canada on purpose because it reduces volatility:

* https://www.vanguard.ca/content/dam/intl/americas/canada/en/...

* https://benderbenderbortolotti.com/home-bias-in-the-vanguard...

Vanguard/Blackrock could set the allocation to whatever they wanted, but it's a conscious choice. Absolute returns are not necessarily the only consideration (if they are, perhaps buy a NASDAQ fund).

[supportengineer]

>> Index funds aren't supposed to save you from a market setback

That's what bonds are for!

[twic]

Depends on the index. The usual ones are indeed market cap weighted, and so adopt the overvaluation of bubble stocks, but there are indexes which are weighted otherwise, in an attempt to avoid that. One example is the RAFI fundamental family of indexes:

https://www.rafi.com/index-strategies/rafi-fundamental-indic...

They are pretty cagey about the exact formula, but they do say that

> Security weights are determined by using fundamental measures of company size (adjusted sales, cash flow, dividends + buybacks, and book value) rather than price (market cap).

The top ten holdings in their US index are (rank - company - weight):

  1 Apple 4.1
  2 Microsoft 3.4
  3 Alphabet 3.3
  4 Berkshire Hathaway 2.3
  5 Amazon 2.2
  6 Meta Platforms 2.2
  7 JPMorgan Chase 2.1
  8 Exxon Mobil 2.0
  9 Bank Of America 1.4
  10 Chevron 1.3

Whereas those of their benchmark, the Solactive GBS United States Large & Mid Cap Index, whatever that is, are:

  1 Nvidia 7.1
  2 Microsoft 7.0
  3 Apple 5.7
  4 Amazon 4.0
  5 Alphabet 3.7
  6 Meta Platforms 3.1
  7 Broadcom 2.4
  8 Tesla 1.7
  9 JPMorgan Chase 1.5
  10 Eli Lilly 1.3

[imakwana]

Glad to see a fellow fundamental indexer on HN! As a US based investor, I personally invest in the RAFI US broad market fundamental index (FNDB ETF) which does keep up with the Vanguard US total market over the past 10 years except the bubbly years of 2020/2021 & 2024/2025, even with a higher expense ratio.

Last 10 years comparison (VTI vs FNDB): https://www.portfoliovisualizer.com/backtest-portfolio?s=y&s...

In my case, after observing the Covid-19 craziness in market, I decided to dig further on value strategies and discovered this gem from Research Affiliates in Journal of Portfolio Management circa 2012, which completely convinced me on the concept of fundamental indexation as a superior alternative to market-cap weighted total market index.

Rebalancing and the value effect (JPM 2012): https://www.researchaffiliates.com/content/dam/ra/publicatio...

[anonymars]

2012 was a long time ago. I'm more inclined to Value myself, but has it held up?

I threw together a quick comparison with that tool (handy, thanks) of Vanguard Growth vs Vanguard Value and it's not too pretty. Sure, Value is less volatile, but...

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&s...

I mean I guess we'll see what happens when the music stops again, but it resembles the same issue as being "right" about a market drop -- that you can be right, but the timing is such that it nevertheless would have been more lucrative to be invested the whole time anyway

[bryanlarsen]

My comment was originally much larger, but I trimmed it because it was muddying my original point.

Yes, you can choose an index fund that's not cap-weighted S&P 500. However, any index fund that didn't have a substantial portion of its investments in NVDA and friends did very poorly over the last few years.

So either way, you're screwed.

- If your index has a lot of NVDA et al, you're exposed to lots of risk.

- If it doesn't, your investment values are currently a lot lower than they otherwise have been.

So ideally you would be in cap-weighted S&P now and for the last few years, and switch just before the seemingly inevitable crash.

But that's no longer "put it in an index fund and forget about it".

[twic]

You're certainly right that indexes like these don't benefit from the bubble!

But it's not the case that they "did very poorly". Forgive the UK sources, but compare HMWO (an MSCI World ETF) [1] and PSRW (a RAFI All World 3000 ETF) [2]. These are world indexes, but that's 70% US or something. For the last five years:

  Date         HMWO   PSRW
  07/24-07/25  15.77  13.49
  07/23-07/24  18.46  14.35
  07/22-07/23  13.86  13.87
  07/21-07/22  -9.06  -4.93
  07/20-07/21  35.31  38.57

It's a small difference. For a set-and-forget investment that insulates you from an AI bubble collapse, it's absolutely fine.

Funnily enough, if you go further back, the RAFI index is actually further behind. No idea what that's about.

[1] https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Do...

[2] https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Do...

[bryanlarsen]

HMWO is 5.5% NVDA. It's not significantly different from the S&P 500. Any world cap-weighted index is going to have the same issue.

[keernan]

The concentration isn't the 'fault' of indexing per se. There are two styles of indexes used by funds/etfs.

1. Most indexes are market capitalization weighted indexes... which can lead to the high concentrations we currently see.

2. There are also equal weighted indexes. These are less popular for a multitude of reasons, not the least of which is the expense associated with keeping the fund equal weighted (the fund has to periodically - eg quarterly - buy/sell stocks to bring everything back to 'equal'

I am currently in the process of moving a portion of my allocation into an equal weight sp500 fund precisely because I want to lower my exposure to the largest ten stocks in the sp500.

Another way to accomplish that would be to buy a market capitalization weighted index consisting of mid size or small cap stocks - thus avoiding the concentration of the top 10. But that changes the overall portfolio in other ways (small cap factor). I decided to use equal weighting a portion of my large cap holdings because I feel it is a more precise way to address the very specific problem I am addressing without adding other variables.

[throw0101a]

> Index funds won't necessarily save you.

So first off, picking individual winning stocks is hard because new information that determines pricing comes in randomly, so good luck getting information edge on your counter-party:

* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

Further, <5% of stocks actually make up the vast majority of earnings:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122

Those winning stocks also change over time: what used to be a winning choice can become a losing choice, so it's not like you can really set and forget things.

So index funds, buying all companies (especially if you go for more total market, like US Russell 3000), allow you to sidestep all of these risks. You are basically buying companies that service the entire economy, so as long as the economy is doing reasonably well the earnings of the companies will do reasonably well.

So yes, the S&P 500 is highly concentrated, but that is not the only index. Diversification is generally not a bad idea:

* https://ofdollarsanddata.com/do-you-need-to-own-internationa...

* https://www.youtube.com/watch?v=1FXuMs6YRCY

[supportengineer]

Check out RSP as an alternative to IVV.

[cyanydeez]

there's very little psychology left in most of the market.

There's computers and computer logic.

[marcosdumay]

> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.

If you want to make it less vague, you can read Keynes.

It's inequality that is the important one, money printing doesn't impact it (except for it impacting inequality). In simple language, people don't want to spend all their money on consumption (the "demand is infinite" you see on econ101 is an approximation), and so when only two dozen people have all the money there aren't many things you can sell and turn a profit. But those people still want to invest all the money they aren't using, there is just nothing to invest into.

At the turn of the 19th to the 20th century, explaining this was a huge open problem in economics.

[electrograv]

I had no idea Keynes had similar ideas, so I definitely should read his work (and economics literature in general).

I probably should generalize my thoughts though to say “expectation of economic growth” (instead of just “money printing”) seems to me necessary to yield “opaque market insanity”, as opposed to “transparent evil sanity”.

As a thought experiment, consider a (practically impossible) scenario where there is universally no expectation for long-term economic growth/contraction — regardless of whether it’s “real” or just monetary. Then by definition, a long term market simply cannot exist at all. No amount of wealth inequality can cause market insanity if there is no (long-term) market at all.

Wealth inequality in such a situation can still yield hoarding, domination, conquest, control, scams, manipulations, etc. But I wouldn’t call that “market insanity” so much as “evil sanity”.

In practice, the real impact of wealth inequality on the common people would likely be the same either way. However, without long term economic growth/inflation, the “sane evil” of the greedy wealth can no longer hide behind the veil of “market insanity”.

[marcosdumay]

Humanity have always had markets, investment has been a thing for thousands of years, while economy growth wasn't something people expected until something around the middle ages.

You probably won't get a lot to support that idea on the literature.

[andrepd]

Financial markets and capitalism has only existed for ~300 years, even if trade did happen since the start of recorded history.

[hollerith]

The Romans had private ownership of land, mines and early industrial concerns (e.g., steelmaking) 2000 y ago. They had a legal system to protect the interests of investors. Also, professionals specialized in providing various financial services.

[immibis]

And capitalism with unlimited ability to print money has only existed for 53 years. And capitalism with actual unlimited money printing has only existed for 17 years. These aren't ancient systems or part of fundamental human nature; they're modern experiments.

[marcosdumay]

The restriction on how much money banks can print has only some 200 years. A while before that, banks invented unlimited money printing, and a while before that banks were completely reinvented as regulated entities because money was coming and going without control...

I don't know how the ancient civilizations handled non-metalic money, I know that on the Middle age it was a famous kingdom killer because most kings couldn't refrain from creating infinite money.

[imtringued]

Calling these things modern experiments even though nothing fundamental has changed since the Roman age seems pretty foolish.

If anything, the experiments you're talking about are just the logical consequences of doing the same thing over and over.

After all, the experiments never seemed to modify the problematic element, all they did was increase the quantity according to the logic of accumulation.

In fact, isn't it remarkable that the last 2000 years have produced the exact same pattern over and over again?

The logic is always the same. Money from period A can be carried over to period B. This means there is too little money during period A and too much during period B.

Since period A is perpetually today, and period B is perpetually tomorrow, one could get the idea to at least fix period A, which isn't as stupid as the Austrian economists would like to tell you. But fixing today through quantity means there is even more money carried over to tomorrow. The problem is being fixed with more of itself. It certainly isn't being fixed by having a competing system for trade.

Abandoning gold, fractional reserve banking, QE, etc all exist due to the fundamental mistake of making it possible to carry something that is time and location bound away from the time and location it is bound to.

Reintroducing a gold standard doesn't change this logic. It just makes it slightly more visible.

When you look at Arrow-Debreu models, you see the assumption is that utility maximizing economic agents will spend their entire budget on either present utility (consumer goods) or future utility (investment goods). The concept of carrying money from one period to another doesn't exist and is inherently incompatible with equilibrium and yet you don't see economists warning us about the carrying over of past balances into the future with the exception Keynes and Wolfgang Stützel. Not even Marx thought that this was problematic. Even the Austrian economists know the problem, as they argue that the single individual with the lowest time preference should own the entire planet and that the real problem is the national central bank (which happens to be quite small in contrast to world domination).

The problem and its half baked attempts at solutions is at least as old as Christianity. Possibly all the way back to mesopotamia.

[mitthrowaway2]

Money printing does directly impact inequality, via the Cantillon effect; in most cases, the printed money is put into the system in a way that disproportionately increases prices of assets that are held disproportionately by the wealthy.

[rstuart4133]

> there is just nothing to invest into.

I think you have just defined gold and bitcoin to be "nothing".

Sounds about right.

[NoMoreNicksLeft]

True investment is when you put capital into a project or endeavor that is expected to earn rewards beyond its future sale price. You open a restaurant, and sell meals for more than the cost to make them. If your only hope is that 3 years from now you can sell the restaurant for more than you bought it for, it's no investment. Even if gold will be worth more, it won't make more of itself.

[Zigurd]

A post-truth environment adds to the ickyness of the feeling: on top of the bubbles, we've got RFK Jr. deciding the fate of biotechnology companies. Having a tech bubble at the same time science is being vandalized at NIH and in universities looks pretty damn dark.

[ethbr1]

Not just RFK Jr. The rest of the government requiring a 15% kickback from Nvidia and AMD to approve GPU sales to China, and the CEO of Intel being told to resign.

I feel like I'm going to be able to tell my adult kids "Yeah, when I was younger the Republicans were the party of free trade and government non-intervention in private industry..."

[immibis]

Conservatives have never been that party. They've always been the part of making the rich richer and the powerful more powerful by whatever means seem to work today. In the past free trade seemed to do that. Now arbitrary trade restrictions seem to do that. Or at least they feel so.

[827a]

Yeah its important to decompose those two sources (among others) of "money printing". The obvious one people think most about is when our federal government does it. But a more concerning one is: Enforced banking reserve ratios. If a bank holds a trillion dollars in assets and is allowed to hold a reserve ratio of 10%, they can print $10T out of thin air, because they're allowed to issue debt up to that amount.

As far as I'm aware, in 2020 the reserve requirement in the US was set to 0%, and it has not been changed since then.

[electrograv]

Yes, but with the “revolving door” between private financial institutions and government financial policy/regulation, there’s little real distinction anymore between the two.

Those private banks can print that money out of thin air because government allows them to. And the government officials (many formerly financial executives) allow them to because they “have to” to prevent “disastrous” private banking/financial collapse.

But if you or I wanted to play the same games to print our own money they way they do? No, that would be wrong and dangerous and illegal!

So it’s pretty clear that both government and private financial institutions are tightly coupled partners in a mostly corrupt, intentionally obfuscated shell game that primarily serves to keep money and power steadily flowing into the hands of the already wealthy and powerful.

Just look at who is actually held accountable for financial crimes. Some individual trader that finds and exploits some glitch that allows them to profit from the wealthy? Straight to jail. High ranking institutional powers (government and private) that implement often illegal schemes that continuously siphon wealth from common people into their hands? Slap on the wrist at most.

[kasey_junk]

Reserve ratios have not been the major capital constraint for a very long time. Loan to deposit ratios have been. And those have stayed in normal bounds since the great financial crisis. Both bank regulators and importantly bank investors keep on top of this because they are the ones to lose the most if it gets out of wack.

The reserve requirement had to be loosened because banks became too conservative, largely because their investors were skittish about ldr.

[underlipton]

You think that there might be a "quality to the quantity" wrt deposit levels after years in an ultra-low interest rate environment? IIRC, deposits in SVB, FRB, and Signature combined outsized WaMu, with the difference being that WaMu was one of the largest banks in the country, while the average person had not heard of Silicon Valley Bank et al. until the day "Silicon Valley Bank Fails," lit up headlines.

[kasey_junk]

At least in the svb and frb case high ldr contributed to the bank runs that ended them. But note in this context frb at .96 was seen as bad and svb at 1.6 was disastrous(.7 is good).

Thats the real brake on money creation by banks, not the reserve requirement.

[anzumitsu]

This is a misconception afaik, yes there is no longer a literal percent reserve requirement but banks are still required to be “adequately capitalized”, the metric is just more complicated now.

[toast0]

Doesn't our federal government set reserve ratios? They may not be creating money, but by setting the ratio (and other limits), they at least have a strong influence on creation.

[andrepd]

I wish I could print 400,000€ to buy a house with 40k in my account.

[anonymars]

Isn't that a mortgage?

[kzzzznot]

All you need is some deposits

[araes]

Another source in the last half a decade or so is digital coin "mints."

Quick look on coin market puts the total market value at ~$3 trillion. Yet that money effectively was created from nothing. It's basically money printing.

With credit cards that accept digital coins as financial sources it's also started to affect the actual markets significantly.

From the charts shown, markets have also gotten quite a bit frothier, with larger swings and spike / drops in margin, since 2020 when coin valuations really took off.

Personal view, it probably also contributes since it's less "real" from a certain perspective. Just digital numbers to wager, that don't really mean the same as mortgaging your house. "Eh, just wager like 10 or 20 digi-coins on margin." Except that's like $1-2 million these days.

[lazide]

Notably, very little of the US economy is plausibly basic needs (a roof over ones head, basic nutrition, actual basic medical care, etc.). The vast, vast majority is essentially luxury goods and services, but Americans have been conditioned to think what the rest of the world considers luxury is actually basics.

If Americans actually cut back to actual basics (a fixer upper small house in a less desirable area), shared a older used car instead of buying several new ones (or a big truck!), made homecooked stews and beans and rice instead of eating out all the time or prepackaged food, stopped buying the latest fancy phones, took care of their health instead of gastric bypasses, dialysis, etc.

Hell, even if the average American stopped taking expensive vacations!

The world economy would likely collapse overnight, no joke. And it would likely be uglier than the Great Depression domestically.

[like_any_other]

> a fixer upper small house in a less desirable area

A lot of an area's desirability has to do with crime rate. Bulgaria has a homicide rate of 1.088, and the US 5.763. So what would be considered a very safe, friendly neighborhood in the US, would be average or worse in Bulgaria. In this sense, "luxury" is flipped - what Bulgarians would consider basic, would be "luxuriously safe" in the US.

[lazide]

What I’m referring to is random suburb and/or middle of Kansas type areas, which generally have middling to low crime rates in the US.

They’re often not close to jobs or very interesting socially, however.

Jobs and social opportunities are why Sofia is the big draw it is in Bulgaria, for instance.

I do see Bulgaria in general as being 3.8/100k for murder? [https://en.m.wikipedia.org/wiki/Crime_in_Bulgaria].

Inner cities and specific (relatively uncommon!) rural areas (often in the Deep South) are what are dangerous in the US, and paradoxically even inner cities are often expensive to live in. Here is a map of homicide rate on a county by county basis [https://commons.m.wikimedia.org/wiki/File:Map_of_US_county_h...].

People often move to LCOL areas anyway to escape the crime and high costs of the cities when there are economic issues in the US.

[pjc50]

"Cost of living" correlates fairly well with the available jobs and incomes in a region. You generally can't move to a LCOL region while also having a high paying job. Which is why the possibility of full remote work was so exciting for so many people.

[lazide]

True, though COL tends to lag the actual jobs (both up and down) for various reasons.

Which we definitely saw with remote work - both pros and cons.

[arduanika]

This is true.

Bernays did more to end the Great Depression than Keynes, and to prevent its recurrence post-war. Sad truth.

[wpm]

> Hell, even if the average American stopped taking expensive vacations!

Lmfao what world do you live in where they haven't?

[throw0101a]

> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.

Except that the Gilded Age, which had some of the highest levels of wealth concentration and inequality, was during the period of the Gold Standard where money could not be 'printed excessively'. And this was true not just in the US but most of the major countries in the world.

Further, while wealth inequality has risen in the US under the non-gold fiat system (to levels similar to the Gilded Age), other countries do not have as much wealth inequality even though they are also non-gold fiat.

[immibis]

You are right - it's about the inequality of holding the money, not the rate at which it's printed. Money printing is relevant to the extent it mostly flows towards the already rich. If money was printed and distributed to everyone evenly it would have the opposite effect.

[salawat]

That can easily be explained away in that the wealth concentration was a symptom of vertically integrated hard network based implementations (railroads, logistics, shipping, extraction), and the Gold Standard may have braked some level of wealth inequality acceleration and centralization to a degree, but that the trusts and business structuring were the cause moreso than any inherent tendency toward gold as basis to full fiat.

That explains why we're seeing what we're seeing now. It's all about network monetization.

[gscott]

If the very most you need to live on is 10 million. You can gamble the rest. Buy apartments, jack up the rents like crazy worst thing to happen to you is that people may move out. Buy stocks on margin, win some loose some. The real economy your play toy.

[harmmonica]

Not sure why you're being downvoted. Word "gamble" too inciting? Maybe if you'd used "much more risky investments" instead, but I'm not here to quibble about your language but to agree with you and extend what you're saying. I actually think the $10 million number is also relative to age because someone who's 30 and "merely" a millionaire can and will invest up the risk ladder as if they're a 50-year-old risking their above-$10 million capital. And the population of people who are millionaires vs decamillionaires is of course a healthy multiple so there's a lot more risk appetite than the relatively small number of decamillionaires would suggest.

As an aside I feel like there's this terrible trend where folks focus so much effort and energy worrying about whether billionaires should exist, whether they should be taxed more aggressively, etc. that we've lost the plot on just how much loot even a net worth of $10+ million is. And at the risk of me writing a too-long comment (bad habit), think of the risk appetite someone has when their decamillionaire parents pass away, and they're given, sometimes overnight, millions of extra dollars. Sure, maybe they'll buy a house, but oftentimes those funds go straight into the market. With boomers starting to leave this mortal coil and their trillions of dollars being passed down you can start to understand why the market seems disconnected from historical fundamentals.

[BetaDeltaAlpha]

>I have a vague theory that as the amount of wealth inequality increases in a system along with “money printing”...

This is well understood by some schools of economics. It's called The Cantillion Effect.

https://mises.org/mises-wire/cantillon-effects-why-inflation...

[camillomiller]

This is a very sad yet resoundingly plausible take. Scary.