A new study claims that 50% of US Investors (and 78%of younger ones) want exchange-traded funds only in their portfolios, with no stocks at all, an they want it done in five years.

"NOTE: my definition of active investing is not limited to market timing, but also means the selection of individual stocks as opposed to passively investing with index ETFs.

1. What do you think of the study? Reality or overreaction?

I absolutely believe the results of this study, particularly for younger investors. I've met a lot of investors who think that individual stock investing involves catching a meme stock or picking the next NVDA. These are games that many don't want to play. Few understand that good investing can mean picking 20-30 individual stocks that will simply perform better than average, or provide more stability.

2. Why would investors want an ETF only portfolio? What are the upsides and downsides?

I can think of numerous reasons.

a) Many investors are driven by fear. There are countless stories about single stock crashes and people losing too much with a risky bet. I see them everywhere: in movies, on reddit, on news, everywhere. But I rarely ever see stories of successful diligent long-term investing (they're relatively boring stories). Warren Buffet is an exception, and his approach is often held up as an example of the right way to invest in stocks. While he is generous to share his knowledge, his advice is for novice investors to use index funds.

b) There are numerous studies about fund managers rarely outperforming the S&P 500. However, what these studies often ignore is that of the thousands of mutual funds, very many are not aiming to outperform. Rather, their objective is to act as a pooled investment vehicle for investors who do not meet the minimum for a personal advisor. For example, target-date funds have explicit allocations targets which are designed for a safe retirement. They were never even trying to beat the market.

c) A vast majority of investments are managed centrally by a few very large firms. By definition, it is impossible for most clients to perform better than average. Therefore, these managers take a more passive and indexed approach. It is in their interest to perpetuate the idea that it is not possible to beat the market. Otherwise they might lose clients to advisors who can. Peter Lynch wrote about this as far back as 1989. He points out that these firms are investing so much money, it instantly disqualifies thousands of stock that don't meet certain criteria. This is a lost opportunity as plenty of these smaller companies perform better than the market and are not too difficult to spot.

d) Few investors can even remember when the market as a whole declined by 30% (except for Covid). For over 15 years, the market average has been an excellent investment for everyone. But during a major financial crisis, what you own matters. A portfolio of high quality stocks can potentially avoid the same losses as market averages. This is particularly true with today's degree of concentration risk in the indices.

By the way, many Wall Street firms are now forecasting lower than average returns over the next decade. (see links below). This is caused by distorted valuations today that are assuming a lot of "growth promise".
- https://finance.yahoo.com/news/goldman-10-forecast-global-stocks-115351991.html
- https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/vemo-return-forecasts.html
- https://am.jpmorgan.com/us/en/asset-management/institutional/insights/portfolio-insights/ltcma/

Upsides) High returns compared against bonds, real estate, interest-bearing accounts. Perceived safety in diversification over 500+ stocks.

Downsides) Concentration risk, given that 7 stocks represent about 1/3 of the S&P 500. Loss of proxy voting power.

3. What would the stock market (and investors' strategies) look like when and if individual stocks are demonitized? For starters, would smaller stocks would be decimated? What's your take and why?

Despite the current long-term trend towards passive investing, it will never fully replace active investing. The more that investors invest passively, the bigger the rewards for successful active investors. This is known as the Grossman-Stiglitz paradox and has robust academic foundations. (https://www.investmentadviser.org/active-managers-council/active-management-and-market-efficiency/). My view is that the fewer investors who actively invest, the easier it becomes for others to beat the market.

4. What's your advice to an investor who wants an ETF-only portfolio?

Although we favor portfolios of individual stocks, we recognize there is a place for a passive equity allocation. Our view is that portfolio diversity also includes having multiple investing approaches. We feel that 25-75% of an investor's equity portfolio can be allocated to 20-30 individual stocks. Our clients hold a core equity exposure through ETFs, while we actively manage their individual stocks. Like any smart diversification, blending active and passive investing can improve returns while reducing risk."