The shift to index funds was triggered not by a belief in market efficiency, but by the surprising discovery that alternative investments are highly tax-inefficient for individuals due to non-deductible fees and ordinary income, creating a tax drag of up to 20%.

Widespread adoption of alternatives in "off-the-shelf" target-date funds faces immense inertia. The initial traction will come from large corporations with sophisticated internal investment teams creating custom target-date funds and from individual managed account platforms, which are far more nimble.

The optimal level of diversification is the maximum you can achieve at a very low cost. Investors should stop diversifying when the marginal benefit is outweighed by significantly higher fees, such as moving from broad market ETFs (3bps) to private equity (400bps).

The primary decision-makers for mass-market 401(k) plans are often HR or finance teams, not investors. To shield their companies from employee lawsuits, they have historically prioritized funds with the lowest fees, creating a massive structural barrier for higher-fee alternative investments to gain traction.

The dominance of low-cost index funds means active managers cannot compete in liquid, efficient markets. Survival depends on creating strategies in areas Vanguard can't easily replicate, such as illiquid micro-caps, niche geographies, or complex sectors that require specialized data and analysis.

Vanguard's first index fund had a ~2% expense ratio (180 bps), far from today's near-zero fees. This historical fact shows that for innovative financial products, low costs are an outcome of achieving massive scale, not a viable starting point. Early fees must be high enough to build a sustainable business.

Contrary to classic theory, markets may be growing less efficient. This is driven not only by passive indexing but also by a structural shift in active management towards short-term, quantitative strategies that prioritize immediate price movements over long-term fundamental value.

Contrary to the belief that indexing creates market inefficiencies, Michael Mauboussin argues the opposite. Indexing removes the weakest, 'closet indexing' players from the active pool, increasing the average skill level of the remaining competition and making it harder to find an edge.

While indexing made competition tougher, the true headwind for active managers was the unprecedented, concentrated performance of a few tech giants. Not owning them was statistically devastating, while owning them reduced active share, creating a no-win scenario for many funds.