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This is a valid point, and folks who take a long-term view tend to come out ahead over the long periods, even going through worse disruptions than COVID (which,

by ptero 6y ago

This is a valid point, and folks who take a long-term view tend to come out ahead over the long periods, even going through worse disruptions than COVID (which, in my view is not that big when compared to wars, revolutions and such). I am not a financial planner, but just a few thoughts. First, folks who try to invest in crashes or divest on peaks tend to do it too early. Most of such events give you more than one opportunity to buy/sell and not being first in/out can give big advantages. Second, we did not (yet?) see a big drop. A rise of 20% would put S&P at or near all-time highs. For comparison, during the 2008 crash, S&P dropped by over 50%, so the rise back would give you ~120% return. Thus the reward for "catching the knife" today is much, much smaller than in 2008. Finally, a lot of stocks are now indexed and held in retirement accounts. Many folks there hold more than they should in stocks because they have been going up and seem to be the only game in town beating inflation. And all advisors say "leave your retirement accounts as is, long term view, yada yada". If a significant number of people start moving retirement money out of index funds, which they might do in uncertainty, there may be a lot of pain for stocks. For example, many smaller stocks just do not have the trading volumes to withstand even a moderate sales increase driven by index funds. My 2c.

JMTQp8lwXL 6y ago
> If a significant number of people start moving retirement money out of index funds A significant number of people do not also control a significant portion of total stock ownership. Droves of retail investors could sell, but their ownership is rather inconsequential: the top 10% of Americans own 84% of stock. https://money.com/stock-ownership-10-percent-richest/ https://money.com/stock-ownership-10-percent-richest/
- l2p 6y ago
  There would still be consequences in the short term if droves of retail investors begin to sell. Consider normal daily/weekly volume, and what would happen if a large percentage of retail decides to liquidate at once. More sellers than buyers will depress share price irrespective of those sellers total % of ownership.
- DuskStar 6y ago
  Yes, and? What percent of that 10% are nearing retirement age or retired, and might want to de-risk? And personally I'd say that the 90th-99th percentile investor (if not 99.9th percentile) would still qualify as "retail" - what proportion of stocks do the top 1% (or 0.1%) of holders own?
MiroF 6y ago
> If a significant number of people start moving retirement money out of index funds If a significant number of people start moving money out of index funds, causing a decrease in the price of index funds, then that is just an opportunity for profit-making from other investors, which will stabilize the price.
- ptero 6y ago
  If an index fund was an "atomic" independently traded unit, probably. But in index fund, for each $1 sold, managers must sell the underlying stocks that comprise the index in the exactly prescribed proportions. While this is not a problem for many heavily traded stocks, a lot of smaller stocks, even in SP500, do not have the volume to support a lot of shares changing hands, so their prices will likely collapse way more than the index. Which may trigger more selling. There was a discussion on this on HN a few months ago. This is not a problem for actively managed funds, which have caveats that allow managers a lot of freedom. If there are no buyers for stock X, they do not have to sell it. Index funds do not get any such flexibility. The impact is amplified as the amounts invested in indices ballooned in recent years. I do not think anyone knows if this scenario will happen and, if so, how bad the fallout will be, but there are systemic risks that go beyond sales uniformly depressing a price for a basket of stocks.
  - MiroF 6y ago
    Nope. If prices of the underlying stock collapse because of index selling due to movement out of retirement funds, then other investors will buy the underlying stock, stabilizing the price - even if they are not buying the fund. Selling doesn't automatically trigger more selling, that's just a media narrative. This might be true for very illiquid assets, but that is not publicly traded stocks.

by ptero 6y ago

JMTQp8lwXL 6y ago

> If a significant number of people start moving retirement money out of index funds A significant number of people do not also control a significant portion of total stock ownership. Droves of retail investors could sell, but their ownership is rather inconsequential: the top 10% of Americans own 84% of stock. https://money.com/stock-ownership-10-percent-richest/ https://money.com/stock-ownership-10-percent-richest/

l2p 6y ago
There would still be consequences in the short term if droves of retail investors begin to sell. Consider normal daily/weekly volume, and what would happen if a large percentage of retail decides to liquidate at once. More sellers than buyers will depress share price irrespective of those sellers total % of ownership.
DuskStar 6y ago
Yes, and? What percent of that 10% are nearing retirement age or retired, and might want to de-risk? And personally I'd say that the 90th-99th percentile investor (if not 99.9th percentile) would still qualify as "retail" - what proportion of stocks do the top 1% (or 0.1%) of holders own?

MiroF 6y ago

> If a significant number of people start moving retirement money out of index funds If a significant number of people start moving money out of index funds, causing a decrease in the price of index funds, then that is just an opportunity for profit-making from other investors, which will stabilize the price.

ptero 6y ago
If an index fund was an "atomic" independently traded unit, probably. But in index fund, for each $1 sold, managers must sell the underlying stocks that comprise the index in the exactly prescribed proportions. While this is not a problem for many heavily traded stocks, a lot of smaller stocks, even in SP500, do not have the volume to support a lot of shares changing hands, so their prices will likely collapse way more than the index. Which may trigger more selling. There was a discussion on this on HN a few months ago. This is not a problem for actively managed funds, which have caveats that allow managers a lot of freedom. If there are no buyers for stock X, they do not have to sell it. Index funds do not get any such flexibility. The impact is amplified as the amounts invested in indices ballooned in recent years. I do not think anyone knows if this scenario will happen and, if so, how bad the fallout will be, but there are systemic risks that go beyond sales uniformly depressing a price for a basket of stocks.
- MiroF 6y ago
  Nope. If prices of the underlying stock collapse because of index selling due to movement out of retirement funds, then other investors will buy the underlying stock, stabilizing the price - even if they are not buying the fund. Selling doesn't automatically trigger more selling, that's just a media narrative. This might be true for very illiquid assets, but that is not publicly traded stocks.