Pragmatic Capitalism

Practical Views on Money, Finance & Life

Most Index Funds are Macro Funds

I’ve been having a good discussion on Twitter with Tren Griffin about indexing and value investing.  Value investors are stock pickers.  They think they can find the buried gems in the market that others can’t find.  It’s certainly possible.  And Tren agrees that only about 5% of people are any good at it.  And that’s the thing, it’s not realistic for most people to rely on such an approach.

What I find interesting though, is that most people don’t think of index funds as macro investing.  But what is an index fund?  An index fund is just an inactive bet on a macro trend.  If you buy the S&P 500 index you’re basically making a bet on corporate America.  If you were to combine that with an aggregate bond index you’d simply be diversifying your bet on corporate America.  But the point is, you’re still making a macro bet that corporate America will do well.  You’re not making micro bets.  And if you diversify even broader then you’re just extending this macro bet to other markets.  If you bought the Vanguard Total World Index and combined it with an aggregate bond index you’re just placing a global macro growth bet.  That’s all.  In other words, index funds are mostly just macro funds.  I call them “lazy macro” strategies.  And lazy portfolios are just fine for most people.

Of course, there’s varying degrees of macro investing.  You can be extremely passive like the John Bogles of the world.  Or you can be more strategic and tactical like the Ray Dalios of the world.  Either way, it’s all macro….And that’s the future of the world.  Macro.  As I always say, it’s a macro world and we’re all just living in it.

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering low fee asset management, private advisory, institutional consulting and educational services.Cullen is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Cullen Roche

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