5 ms·

But, what if everybody only buys index funds and there arent any active players anymore ? I am not an expert in this field, but I do feel that the passive natur

But, what if everybody only buys index funds and there arent any active players anymore ? I am not an expert in this field, but I do feel that the passive nature of index funds has been benefiting greatly from the actions of active investors.

jorblumesea 8y ago
No one really knows, to be honest. But, many "active managers" were indexing before indexing was widespread, so it's unclear how much of a real change this is. Even hedge funds use index funds to back some of their riskier moves and it's common to use a blend of indexes and shorts. It really begs the question...how active was active before wide spread indexing? It's not really as binary as many perceive. It's not as simple as active vs passive. The future is probably some kind of balance between active and passive.
the_gastropod 8y ago
Yep, if everyone went passive, it would probably become a problem. But currently, less than 18% of global stocks are owned by index investors [1]. And there's likely an equilibrium point between 18% and 100%, where both active and passive investment make sense. [1] https://www.reuters.com/article/us-funds-blackrock-passive/less-than-18-percent-of-global-stocks-owned-by-index-investors-blackrock-idUSKCN1C82TE https://www.reuters.com/article/us-funds-blackrock-passive/l...
adrianN 8y ago
The more people invest in index funds, the more opportunities for active investors. The market balances itself naturally.
seppel 8y ago
If everyone invests passive, you could make a ton of money by buying companies which are worth more than their stock or just give you an extremely high dividend.
- ThrustVectoring 8y ago
  A company's dividend has zero bearing on the fair price of its stock. Profits do, but that's a separate decision from dividend. Any money a company makes is either invested in growing the business (increasing the stock's value), or returned to investors, and as long as the investment makes economic sense you don't care either way. Dividends vs stock buybacks are a wash economically - if you look at cash flows, they both reduce the market cap by the cash given to investors. It's just that dividends reduce the price of the stock directly, while buybacks reduce the number of shares outstanding.
  - seppel 8y ago
    > It's just that dividends reduce the price of the stock directly Dividends reduce the price of the stock directly because there is an active market. Once the dividend is paid out, the stock price is decreased by the dividend because this is what market makers are willing to pay now. Without any active market, paying out a dividend would not influence the price, because there are no market makers to begin with. This is of course absurd, so there will always be an active market.
blevin 8y ago
Philosophical Economics has a thoughtful essay on this: https://www.philosophicaleconomics.com/2016/05/passive/ https://www.philosophicaleconomics.com/2016/05/passive/ I’m going to argue that the trend towards passive management is not only sustainable, but that it actually increases the accuracy of market prices. It does so by preferentially removing lower-skilled investors from the market fray, thus increasing the average skill level of those investors that remain. It also makes economies more efficient, because it reduces the labor and capital input used in the process of price discovery, without appreciably impairing the price signal.

jorblumesea 8y ago

No one really knows, to be honest. But, many "active managers" were indexing before indexing was widespread, so it's unclear how much of a real change this is. Even hedge funds use index funds to back some of their riskier moves and it's common to use a blend of indexes and shorts. It really begs the question...how active was active before wide spread indexing? It's not really as binary as many perceive. It's not as simple as active vs passive. The future is probably some kind of balance between active and passive.

the_gastropod 8y ago

Yep, if everyone went passive, it would probably become a problem. But currently, less than 18% of global stocks are owned by index investors [1]. And there's likely an equilibrium point between 18% and 100%, where both active and passive investment make sense. [1] https://www.reuters.com/article/us-funds-blackrock-passive/less-than-18-percent-of-global-stocks-owned-by-index-investors-blackrock-idUSKCN1C82TE https://www.reuters.com/article/us-funds-blackrock-passive/l...

adrianN 8y ago

The more people invest in index funds, the more opportunities for active investors. The market balances itself naturally.

seppel 8y ago

If everyone invests passive, you could make a ton of money by buying companies which are worth more than their stock or just give you an extremely high dividend.

ThrustVectoring 8y ago
A company's dividend has zero bearing on the fair price of its stock. Profits do, but that's a separate decision from dividend. Any money a company makes is either invested in growing the business (increasing the stock's value), or returned to investors, and as long as the investment makes economic sense you don't care either way. Dividends vs stock buybacks are a wash economically - if you look at cash flows, they both reduce the market cap by the cash given to investors. It's just that dividends reduce the price of the stock directly, while buybacks reduce the number of shares outstanding.
- seppel 8y ago
  > It's just that dividends reduce the price of the stock directly Dividends reduce the price of the stock directly because there is an active market. Once the dividend is paid out, the stock price is decreased by the dividend because this is what market makers are willing to pay now. Without any active market, paying out a dividend would not influence the price, because there are no market makers to begin with. This is of course absurd, so there will always be an active market.

blevin 8y ago

Philosophical Economics has a thoughtful essay on this: https://www.philosophicaleconomics.com/2016/05/passive/ https://www.philosophicaleconomics.com/2016/05/passive/ I’m going to argue that the trend towards passive management is not only sustainable, but that it actually increases the accuracy of market prices. It does so by preferentially removing lower-skilled investors from the market fray, thus increasing the average skill level of those investors that remain. It also makes economies more efficient, because it reduces the labor and capital input used in the process of price discovery, without appreciably impairing the price signal.