Author Topic: Passive vs Active - What if everyone bought index funds  (Read 1719 times)

HeadedWest2029

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Passive vs Active - What if everyone bought index funds
« on: September 29, 2016, 12:25:16 PM »
I thought this was a thought provoking article on capital allocation and the future of investing. 
Some really interesting scenarios could play out with the increase in "passive" (I'm an indexer)

https://www.bloomberg.com/view/articles/2016-08-24/are-index-funds-communist

DrF

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Re: Passive vs Active - What if everyone bought index funds
« Reply #1 on: September 29, 2016, 01:01:27 PM »

MustacheAndaHalf

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Re: Passive vs Active - What if everyone bought index funds
« Reply #2 on: October 01, 2016, 01:55:50 AM »
Yes, if zero stocks are bought or sold that's a problem.  Note you don't need as much active investment as most articles claim - percentage ownership has nothing to do with it.  It's the volume that changes hands.

If a dozen active investors are buying and selling 1 share of AAPL every minute, reflecting updated estimates of price... you have a market, even though it's 1 share trading out of billions.  When 99.9% of investors hold, the activity of the last 0.1% of shares determines the market.

I also think 0% turnover doesn't reflect even buy-and-hold investors actual behavior.  Selling 3% of shares once a year to re-balance is 3% bought and sold.  People accumulating in their retirement accounts buy throughout the year.  People in retirement need to pay expenses, and can sell a portion to meet them.  Each of these buy and hold investors is actually buying and selling.

So between the small number of shares actually needed for a market, and the behavior of actual passive investors, I don't think the scare tactics concerning 100% passive investing are accurate.

seattlecyclone

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Re: Passive vs Active - What if everyone bought index funds
« Reply #3 on: October 01, 2016, 02:22:03 AM »
Yeah, it's hard to imagine this scenario ever coming to pass. The more thinly traded a stock is, the less efficient the market is likely to be. But if the inefficiencies become easy to spot, even people who would swear by index funds under current market conditions might decide to go for a few individual stocks that they think are underpriced. The idea that everybody would buy only index funds and the price of every stock would become set in stone as of the date the last person switches to Vanguard...well, it's a fun thought experiment but it's never going to happen.

Mighty-Dollar

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Re: Passive vs Active - What if everyone bought index funds
« Reply #4 on: October 04, 2016, 02:07:30 AM »
There's always going to be uninformed people who think they can win in the zero sum game of picking and trading individual stocks in an efficient market.

jamesbond007

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Re: Passive vs Active - What if everyone bought index funds
« Reply #5 on: October 04, 2016, 02:04:46 PM »
Not likely to happen, at least in our lifetimes. There's a sucker born every minute, as they say.