Passive, index investing has been all the rage ever since the bear market of 2009, but that may change in 2018 if there is any semblance of a down market in the new year.
That's according to Dan Wiener of Adviser Investments, who told Barron's in a recent interview that Vanguard, BlackRock, Inc. (BLK) and State Street Global Advisors will continue to see inflows into index funds until the market corrects. "The Vanguard juggernaut will roll on until we see a very good correction of some length, if not a bear market," Wiener said, noting that, if there is a big downturn, it could be a "complete reversal" from what has been going on for the past several years.
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After seeing their retirement accounts and stock investment portfolios get wiped out in the Great Recession of 2008 and 2009, scores of investors moved to more passive investments such as index funds and ETFs. That has been a boon for BlackRock and Vanguard, the leaders of passive investing. But with a bull run ongoing for years now and stocks priced for perfection, there are concerns that there could be stock market declines next year. While Wiener isn't calling for a correction in 2018, he did note that stocks are trading at high levels, which would mean a decline of 10% or more could bring steep declines in the share prices of stocks. This would likely "scare the bejesus" out of investors, Wiener said. If that happens, it could prompt a desire for more hand-holding and thus a return of enthusiasm for actively managed investing products.
Vanguard itself warned in late November that the stock market in the U.S. is long overdue for a correction of 10% or more, and the firm sees a 70% chance of that happening in the near future. "Having a 10% negative return in the U.S. market in a calendar year has happened 40% of the time since 1960," Joseph H. Davis, global chief economist at Vanguard, told CNBC.
Even if stocks continue to march higher in 2018, Ed Yardeni, a market forecaster, told Barron's that active investing could come back in favor. With stocks already expensive, a stock picker may be able to find cheap stocks that will give investors better returns than investing in an index fund. "2018 is pretty simple: If you think it's a walk in the park, then do passive. If you think this market is already getting frothy and has the potential to really melt down, then you want a manager," he told Barron's.