Features

Book of the week: Trouble ahead for passive investing

Book review: The End of Indexing: Six Structural Mega-Trends That Threaten Passive InvestingAn interesting read that will force you to reassess your investment strategy.

900-The-End-of-Indexing-100

Published by Harriman House, £25

Buy at Amazon

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The rise of passive investing has been one of the big trends in financial markets over the last decade. The idea that investors should stick their money in index funds tracking a major market (such as the FTSE 100 or S&P 500), and then stick with their investments though thick and thin, has rapidly become the conventional wisdom. However, fund manager Niels Jensen thinks investors who follow this advice are likely to end up disappointed. He suggests there are signs of trouble that could reduce returns produced by a simple indexing strategy.

Perhaps the most immediate is debt. Individuals, firms and governments have taken advantage of the low interest-rate environment to borrow more, so that total debt is now higher than it was ten years ago in most major economies. This is likely to become a major problem once interest rates start to normalise.

Advertisement
Advertisement - Article continues below

Meanwhile, an ageing population threatens to weigh on developed economies, because the imminent retirement of baby boomers will reduce productivity (and the tax base), while increasing the burden on social-security and healthcare arrangements.

Jensen also notes that one of the biggest changes over the past 50 years is the decline of the middle class in the developed world, with labour's share of national income declining. This will reduce demand for goods while fuelling a populist backlash that could lead to protectionism. Despite the discovery of shale oil and progress with renewables, energy supplies are running out, which will push up prices.

Even the shift in growth towards east Asia could end up lowering the living standards of those in the West if it makes food more expensive. Finally, the ratio of wealth (ie, asset prices) to GDP looks high and can be expected to revert towards the long-term average at some point, which bodes ill for markets.

Entire books have been written on each of these issues, but Jensen tries to bring all six together in one work, and to focus on the implications for investors. The book is relatively short, at around 200 pages, but he more than makes up for this by providing a large number of references to other reports and studies that the reader can look up in his or her spare time. Perhaps the only real flaw is that at times it is too detailed, with a lot of diagrams, charts and equations.

The End of Indexing is a thought-provoking read. At the very least, it will force you to reassess your investment strategy and should dissuade you from assuming that the current bull market will last forever.

Advertisement

Recommended

Visit/519325/six-contrarian-books-for-christmas
Films

Six contrarian books for Christmas

Merryn Somerset Webb picks six of her favourite contrarian books to help you look clever and perhaps win a few arguments over the Christmas dinner tab…
9 Dec 2019
Visit/513323/coming-to-terms-with-anna-sorokin
Films

Coming to terms with Anna Sorokin

My Friend Anna: The true story of the fake heiress of New York CityWilliams is a solid writer who does a good job of explaining how she, and other int…
21 Aug 2019
Visit/513324/book-in-the-news-the-inside-story-of-spains-tumultuous-crisis
Films

Book in the news… the inside story of Spain’s tumultuous crisis

After the Fall Crisis, Recovery and the Making of a New SpainA book that goes beyond politics to offer a deeply sympathetic portrayal of a country.
21 Aug 2019
Visit/513325/an-offbeat-take-on-economics
Films

An offbeat take on economics

Review: This Giant Beast That is the Global EconomyA new TV series outfreaks Freakonomics.
20 Aug 2019

Most Popular

Visit/investments/stockmarkets/600878/coronavirus-pandemic-financial-markets
Stockmarkets

A global coronavirus pandemic seems inevitable – are markets still too complacent?

Coronavirus is going global. It’s only a matter of time before it’s classed as a pandemic. John Stepek looks at the markets’ reaction, and explains ho…
24 Feb 2020
Visit/investments/commodities/gold/600874/gold-is-at-its-highest-level-in-years-heres-how-to-invest
Gold

Gold is at its highest level in years – here’s how to invest

Gold's rise at a time when the dollar is unnervingly strong isn't unheard of – but it is curious. John Stepek explains what's going on, and what it me…
21 Feb 2020
Visit/investments/stocks-and-shares/600863/sirius-minerals-anglo-american-takeover
Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600725/is-2020-the-year-for-european-small-cap
Sponsored

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019