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There's been something I've been thinking about: with so many people purchasing index funds, what happens when there is a major downturn in the market? What ha
by clubm8 10y ago
There's been something I've been thinking about: with so many people purchasing index funds, what happens when there is a major downturn in the market?
What happens when millions of people sell off their shares in say, VASGX (basically an 80/20 stock/bond index fund)?
Would that effectively tank the entire market rather than sectors doing poorly.
- mason55 10y agoReally depends on what indexing implies. If you're talking about a world where everyone trades actively but instead of trading individual companies they only trade broad index funds then, yes, swings in the market would be amplified. Although in that world you would imagine that there would be a lot of alpha to be picked off by smart traders and so that should counteract the "dumb money" actively trading indexers. If indexing also implies passive/"set and forget"-style trading then you would actually dampen market swings. You'd have fewer people selling as the market tanked and fewer people buying the big rallies.
- nojvek 10y agoI think lots of investors have herd mentality. If it's rising, pump more money, If it's descending, pull out money. I definitely see a big crash if people don't trust the market. Right now things are great as there is a lot of hot money flowing. If people hide the money then you'd need something like stimulus to jump start the system again.
- southphillyman 10y agoOne of the "Pros" of passive investment is that you are in it for the long haul and not reactive to immediate swings in the market. In your scenario I believe the investor is supposed to treat a downswing like you would a 401k account. Cry inside at the losses and wait for recovery since your target date is likely 20-30 yrs down the road.