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Does the stock market perform its socially beneficial function if a majority of capital is passively indexed? Could passive index funds, which seek to mimic th

by cs702 7y ago

Does the stock market perform its socially beneficial function if a majority of capital is passively indexed? Could passive index funds, which seek to mimic the stock market, actually be in control of the stock market? Are they mimicking themselves? Should we be concerned that most passive capital is invested in the same companies, in the same proportion, weighted mainly by market cap? Can passive index fund trading move the stock market? If there is an economic downturn, how would a wave of cash withdrawals from passive index funds affect stock prices? Have active managers changed their behavior in response to the rising dominance of passive index funds? NO ONE knows the answers to these questions, at least not with certainty, because we're in uncharted territory. This is the first time in history that a stock market has been dominated by passive index funds.

uhhhhhhh 7y ago
While no one knows how this will play out, I'm very curious what are experts in various economic camps saying about it, what predictions and warnings are being issued and what logic they are basing that on?
- hndamien 7y ago
  This is the result of people looking to save in a stable vehicle because fiat currency has taken that option from them.
ajross 7y ago
> NO ONE knows the answers to these questions, NO ONE knew the answers to those same questions about active investment either, though. Markets are markets, and behave in crazy unstable pro-cyclic ways because of psychology, not abstract theory. Here's an obvious hypothesis: Nothing's going to change at all. The fraction of holdings in these index funds is high, but matches the fraction that was always just thrown into the "balanced random junk" segments of portfolios. Players who want to make focused bets on particular securities or industries will continue to do so, in exactly the same proportion they did before. I mean, NO ONE knows if that is true or not, but I'd put money down on it.
- cs702 7y ago
  It's possible. I did not make any claims to the contrary. That said, in the event of market stress, it seems that more individual portfolios will be more highly correlated with each other than in the past. Isn't that a significant change? In light of it, are you willing to bet that aggregate investor behavior in a future period of stress will be similar to what we have seen in the past?
  - aaronblohowiak 7y ago
    Maybe it will contribute to the increased correlation between stocks and other investments
- ac29 7y ago
  > The fraction of holdings in these index funds is high, but matches the fraction that was always just thrown into the "balanced random junk" segments of portfolios. Players who want to make focused bets on particular securities or industries will continue to do so, in exactly the same proportion they did before. 30 years ago investing in Index style mutual funds was pretty uncommon. 50 years ago Index funds didn't even exist, and you'd have to have significant wealth to own hundreds or thousands of individual stocks (especially anywhere close to market weighted). We are seeing a fundamental shift in how people invest, though whether or not that leads to a fundamentally different outcome is unknown.
paulpauper 7y ago
i am not too concerned. market crashes such has the 1929 crash predate passive funds by half a century. The market will gravitate to its fair value based on fundamentals and other factors. Most of these passive funds just mirror an underlying benchmark but do not control it. Most trading is done by futures, etfs, and the individual stocks that compose the index. It's sorta like a tug of war between all of these participants to reach an equilibrium and eliminate arbitrage.

by cs702 7y ago

uhhhhhhh 7y ago

While no one knows how this will play out, I'm very curious what are experts in various economic camps saying about it, what predictions and warnings are being issued and what logic they are basing that on?

hndamien 7y ago
This is the result of people looking to save in a stable vehicle because fiat currency has taken that option from them.

ajross 7y ago

> NO ONE knows the answers to these questions, NO ONE knew the answers to those same questions about active investment either, though. Markets are markets, and behave in crazy unstable pro-cyclic ways because of psychology, not abstract theory. Here's an obvious hypothesis: Nothing's going to change at all. The fraction of holdings in these index funds is high, but matches the fraction that was always just thrown into the "balanced random junk" segments of portfolios. Players who want to make focused bets on particular securities or industries will continue to do so, in exactly the same proportion they did before. I mean, NO ONE knows if that is true or not, but I'd put money down on it.

cs702 7y ago
It's possible. I did not make any claims to the contrary. That said, in the event of market stress, it seems that more individual portfolios will be more highly correlated with each other than in the past. Isn't that a significant change? In light of it, are you willing to bet that aggregate investor behavior in a future period of stress will be similar to what we have seen in the past?
- aaronblohowiak 7y ago
  Maybe it will contribute to the increased correlation between stocks and other investments
ac29 7y ago
> The fraction of holdings in these index funds is high, but matches the fraction that was always just thrown into the "balanced random junk" segments of portfolios. Players who want to make focused bets on particular securities or industries will continue to do so, in exactly the same proportion they did before. 30 years ago investing in Index style mutual funds was pretty uncommon. 50 years ago Index funds didn't even exist, and you'd have to have significant wealth to own hundreds or thousands of individual stocks (especially anywhere close to market weighted). We are seeing a fundamental shift in how people invest, though whether or not that leads to a fundamentally different outcome is unknown.

paulpauper 7y ago

i am not too concerned. market crashes such has the 1929 crash predate passive funds by half a century. The market will gravitate to its fair value based on fundamentals and other factors. Most of these passive funds just mirror an underlying benchmark but do not control it. Most trading is done by futures, etfs, and the individual stocks that compose the index. It's sorta like a tug of war between all of these participants to reach an equilibrium and eliminate arbitrage.