3 ms·

> If all the money from the passively managed funds just stays put, will the stocks basically not take much of a hit? The stocks will still take a hit, as we s

by ishjoh 8y ago

> If all the money from the passively managed funds just stays put, will the stocks basically not take much of a hit? The stocks will still take a hit, as we saw in the case of 2008 almost everyone loses money in a market-wide drop. Many active traders went bankrupt as well, the S&P500 lost 50% of its value but didn't go to 0. > Of course if it gets bad enough for companies to go broke, that could go wrong for the passively managed crowd as they'll stay in there till the end, most likely. It depends on how quickly the drop happens. S&P500 index funds will sell stocks as they exit the top 500 (this is a simplification of the actual mechanism), so if the drop is gradual then it's not so bad. If the drop is sudden then there is a bigger problem, but the sudden drop is a problem for everyone, active or passive unless you're doing HFT.

raesene9 8y ago
so the difference I thought there might be now, as compared to 2008 is the percentage of funds that are passively managed. If a proportionately smaller percentage of stockholders are selling then it seems possible/likely that any price swing will be smaller. One example of this "stock markets not reacting to external events" that seems to fit the trend is, to me , the robustness of the FTSE100 since the Brexit vote. It's clear that companies are taking a financial hit in several places and will continue to do so (perhaps precipitously if it ends in no deal) however the FTSE100 is current around 1000 points higher than it was a year ago. That could be because a large percentage of the funds in those stocks are passively managed and therefore don't react particularly to those external events.
- ishjoh 8y ago
  I suspected your hypothesis was correct, that as the percentage of passive funds grows the pricing information of each stock would decrease. Then the question becomes, where are we in terms of what percentage trades are done as a passive investment vs an active investment. Luckily I was able to find an excellent resource that dives into the exact questions we're discussing: https://www.bis.org/publ/qtrpdf/r_qt1803j.htm https://www.bis.org/publ/qtrpdf/r_qt1803j.htm It also makes a note that a lot of active investors allocate funds into a weighted index basket to better match index returns, so it could be that both active and passive funds are contributing to the same price insensitivity. As a final supplemental to the paper given above I also looked at the PE ratio of the S&P500 per year: https://www.multpl.com/s-p-500-pe-ratio/table/by-year https://www.multpl.com/s-p-500-pe-ratio/table/by-year One thing I would also expect is that as passive investing becomes a larger and larger part of the market we should also see the PE ratio rise. I found a site that gives the PE by year (https://www.multpl.com/s-p-500-pe-ratio/table/by-year https://www.multpl.com/s-p-500-pe-ratio/table/by-year) and calculated the following (2019 estimates removed). For all the years 1871 to present: AVG. 15.7 Median. 14.775 STD Dev. 7.25 For 1980 to present: AVG. 20.72 Median. 18.15 STD Dev. 11.18 PE ratio for 2018 was 24.97, which is very high for all of history but seems reasonable for 1980 to today.

by ishjoh 8y ago

raesene9 8y ago

so the difference I thought there might be now, as compared to 2008 is the percentage of funds that are passively managed. If a proportionately smaller percentage of stockholders are selling then it seems possible/likely that any price swing will be smaller. One example of this "stock markets not reacting to external events" that seems to fit the trend is, to me , the robustness of the FTSE100 since the Brexit vote. It's clear that companies are taking a financial hit in several places and will continue to do so (perhaps precipitously if it ends in no deal) however the FTSE100 is current around 1000 points higher than it was a year ago. That could be because a large percentage of the funds in those stocks are passively managed and therefore don't react particularly to those external events.

ishjoh 8y ago
I suspected your hypothesis was correct, that as the percentage of passive funds grows the pricing information of each stock would decrease. Then the question becomes, where are we in terms of what percentage trades are done as a passive investment vs an active investment. Luckily I was able to find an excellent resource that dives into the exact questions we're discussing: https://www.bis.org/publ/qtrpdf/r_qt1803j.htm https://www.bis.org/publ/qtrpdf/r_qt1803j.htm It also makes a note that a lot of active investors allocate funds into a weighted index basket to better match index returns, so it could be that both active and passive funds are contributing to the same price insensitivity. As a final supplemental to the paper given above I also looked at the PE ratio of the S&P500 per year: https://www.multpl.com/s-p-500-pe-ratio/table/by-year https://www.multpl.com/s-p-500-pe-ratio/table/by-year One thing I would also expect is that as passive investing becomes a larger and larger part of the market we should also see the PE ratio rise. I found a site that gives the PE by year (https://www.multpl.com/s-p-500-pe-ratio/table/by-year https://www.multpl.com/s-p-500-pe-ratio/table/by-year) and calculated the following (2019 estimates removed). For all the years 1871 to present: AVG. 15.7 Median. 14.775 STD Dev. 7.25 For 1980 to present: AVG. 20.72 Median. 18.15 STD Dev. 11.18 PE ratio for 2018 was 24.97, which is very high for all of history but seems reasonable for 1980 to today.