Things are not yet crystallized in my head, but I feel invoking ergodicity can provide some explanation to the question of why all index fund investing.
The rational behind not diversifying further into gold, bonds etc is that if you are willing to take more volatility of the market, then you can get higher returns in the long term. But why not invest in just high growth FANG stocks for even higher volatility and return. Index funds seem like an arbitrary line in the risk/reward continuum.
Will update when/if I realize erdogicity can help explain something here.
We've discussed why go all VTSAX (or equivalent) before. It's the simplest, robust path to wealth. You invest in 1 asset, that gives you high diversification with good returns.
The rational behind not diversifying further into different asset classes is simplicity. The rational behind not investing in just high growth FANG like stocks is robustness via diversification.
Ergodicity does seem useful to explain why people shouldn't put money into 1 stock though. For an individual 1 bust is all that is needed to throw them under, and being averse to ruinable risks seems prudent.
If I understood you correctly, then the goal function is "maximize diversification without compromizing simplicity". And index funds seem to be optimal for that.
So what if Vanguard were to offer a single index fund that invests in equity, bonds, gold, real estate etc. That would provide even more diversification without reducing simplicity. Does that mean this new fund is the one we should go for?