The Upcoming Market Crash

There is a market crash coming and it has the potential to be longer and deeper than the financial crisis of 2008.

The world has been on a bull market tear since the financial crisis of 2008. We are still seeing record highs in various indices throughout 2017. The indiscriminate buying in passively managed funds has been a serious contributor to this phenomenon and it will likely be the reason the next market crash is more severe in terms of loss and recovery time.

Passively Managed ETFs gained considerable favour since the 2008 financial crisis.

The world’s electronically traded funds and portfolios have reached over 4 trillion dollars in assets. There are now over 328 ETF providers in over 78 exchanges and 50 countries. Canada has not been immune to this phenomenon. We have over $130 Billion in passively managed assets in the Canadian marketplace. The number doubled from 2008 to 2010 and much of the growth has been in the last year.

What’s driving the investment into passively managed money post financial crisis?

The focus has been on low cost management. With most markets illustrating double digit annual returns why would investors worry? Market volatility is low. Borrowing costs are low. There is little sign of inflation. Investors are feeling pretty good about themselves. All this is driving money into passive investments. Investor complacency is starting to build. They are being led to believe that markets only go straight up.

You’re focused on the wrong thing.

The media would have you believe that fees are the most important factor when it comes to investing. When in fact research has proven that investor behaviour, specifically the timing of investments, is the most important factor. Human nature.

(For more information on investor behaviour read You’re Behaving Badly.)

Investors pulled out after the 2008 financial crisis. Sat on the sidelines. Many are only now starting to return to the market. And they are being drawn by the lure of the low-cost management fees in passively managed portfolios and exchange traded funds.

For more information why I believe the next financial crisis will be worse than 2008 read It's Gonna Be Worse.

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