The Impact of Index Investing: A Follow-Up
philosophicaleconomics.com
philosophicaleconomics.com
An excerpt from the transcript [0] follows:
What I’d like you to do is for a moment, imagine that in this room, you people own all of America. All the stocks in America are owned by this group. You are the Berkshire 18,000 (or whatever it is) that have somehow managed to accumulate all the wealth in the country. Let’s assume we just divide it down the middle. On one side, we put half the people…half of all the investment capital in the world, and that capital is what a certain presidential candidate might call ‘low energy’. In fact, they have no energy at all. They buy half of everything that exists in the investment world – 50 percent – everyone on this side. Now half of it is owned by these ‘low energy’ people. They don’t look at stock prices. They don’t turn on business channels. They don’t read the Wall Street Journal. They don’t do anything. They are a slovenly group that just sits for year after year, owning half of America’s business. What’s the result going to be? The result is going to be exactly average as all American business does because they own half of all of it. They have no expenses – nothing.
What’s going to happen with the other half? The other half are what we call the ‘hyperactives’. The hyperactives’ gross result is also going to be half, right? The whole has to be the sum of the parts. This group, by definition, can’t change from its half of the ultimate investment results. This half is going to have the same gross results. They’re going to have the same results as the ‘no energy’ people but they’re also going to have terrific expenses because they’re all going to be moving around, hiring hedge funds, hiring consultants, and paying lots of commissions, et cetera. As a group, that half has to do worse than this half does. The people who don’t do anything have to do better than the people that are trying to do better. It’s simple.
[0] https://www.biznews.com/global-investing/2016/05/02/berkshir...
It may make more sense selfishly to be in the low-energy group, but the overall returns might be lower the more people go that route.
A flawed car analogy: A driver and passenger will both travel the same distance, but the driver spends a lot more effort per mile.
So it might both be better for each individual to be low-energy yet better for everyone if people were more active.
It's an interestingly complex problem.
In your analogy, I'd say investors are car leasing companies, and it's unclear if they provide a value that can't be just as well provided by the driver(s) buying their cars outright. It would mean that the driver(s) would have to be on more equal footing to the investors, though (they'd have to be able to afford the car).
All counted, isn't it great when incentives align almost perfectly with the global optimum?
Passive investors achieve the average return. Active investors receive some distribution of return but obviously it must range from some above to some below average. 1/x investors get a worse than average return, despite their efforts. For simplicity, let's say that 1/2 of the investors 'win' and half 'lose'.
That losing half would do better if they moved to passive investments, allowing the top half to make the real gains. Now, we're back in the same situation. Does this not continue on until it's selfishly best for everyone to be a passive investor, even though overall that might be worse?
Ways I think I might be wrong:
- The maths doesn't really work quite that way once the balance shifts away from 50% each side. It may be possible that some proportion of active investors will always make more profit than the passive investors. I don't think this is right but if it is then it'd entirely break the reasoning.
- Changes that happen from one step to the next. The winners now own more capital and therefore we don't see the same converging series. I don't think that matters other than prolonging the outcome, but I'd not be surprised if I'm wrong on this count, I've not thought it through fully.
(I'm trying to be more cautious about making overly bold claims and so am trying to point to things I know might invalidate what I'm saying, if it seems annoying then let me know)
Put transaction costs there, and you get an adversarial system. Now the top investors will try to convince the others of their own incompetence. Didn't do the math, but the outcome is probably bad.
Now, fill the market with real humans and irrationality will make sure enough incompetent investors will be active to let a big enough amount of competent ones make a win. Stable again.
I'm really unconcerned about index funds.
[1] A spherical cow in vacuum.
Different individuals on the active side have wildly differing returns. The guy who invests in the hedge fund with 200% returns doesn't care about the 20, 2 fee structure he has to pay on his investment because he's made so much more than the passive guys. There will be large losers and large winners, but you have to pay table stakes (fees) to play and have your shot at winning those big returns.
Buffet is talking his book - a hugely diversified portfolio that basically represents and relies on the strength and growth of the American economy, as well as US government-mandated oligopolies like insurance.
[1] See figure 3: https://wealth.barclays.com/wealth-management/en_us/home/tho...
This was the argument made by Protege Partners, when betting against Buffett in the great "index funds vs hedge funds" long bet [0]. It turns out that the index funds fared better — and they're mainly used for long-term investment, where the short-term macroeconomic ebbs don't have an impact on the overall return.
Of course the variance on the active side will be higher, but there are as many losers as they are winners, and much of it is due to simple randomness. Unless you're confident that you know more than other investors (for many people, including myself, we probably don't [1]), index funds, or "hugely diversified portfolios" are the way to go. Basically, no hedge fund is making those 200% returns you're speaking of, and even if some fund were, empirically it's more likely to be just noise. Look at the result so far of Buffett's bet on hedge funds. It speaks volumes.
[1] https://en.m.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effec...
It's like going into a casino and arguing that the casino is losing because you see one guy hit a jackpot on the slot machine.
But you aren't. That's who he was speaking to and speaking about. Average investors.
Yes, actually, it is. That's the whole point.
The economy will stagnate. Eventually the entire portfolio the room holds will be money losing companies, burning up the country's capital.
The half of the room who are active investors contribute greatly to the economy's long term growth. They could either have negative long run returns as passive investors, or positive long run returns that are less than passive investors.
Index funds are weighted by capitalization. So whether GM's capitalization goes up or not is actually irrelevant: what's relevant is the ratio of its capitalization to the size of the total capitalization of all companies in the market, and how that changes.
Setting that point aside, here's some basic math that shows why this analysis is completely wrong and why GM's market cap will go down. Let's say today, I am the CEO of GM, and I issued 1 million new shares, bringing the total up to 1 Billion outstanding shares. I dump them on the market, when the price was $50. The price drops some amount, because shares are being sold.
How much money did I, as CEO of GM, raise? At most $50 million
How much could market cap possibly have gone up? Exactly the amount that was raised: at most $50 million
How much could market cap possibly have gone down? Drop in stock price * 1 Billion
So market cap increase is precisely equal to the amount of capital provided by investors, which is finite and won't run away into a vicious cycle as suggested by the poster. Market cap decrease can be... well... 100%, all the way to zero. And the more shares issued, the more downward pressure on market cap... as the effect of crossing the bid-ask spread on market capitalization gets amplified.
I'm sorry, that's an invalid assumption. Especially in a world with only passive investors.
GM has been losing $1 billion a quarter for 10 quarters. GM's stock price is $30 as it has been since 10 quarters ago, market capitalisation $40B. It is running out of cash building unprofitable products. The underwriter calls various index funds, telling them there will be a capital raising of $10B, at $28 per share, representing a ~5% discount, and as a result of that, GM's weighting in the index is going to be re-weighted upwards at the next index balance in three weeks, so they might as well sell other (more productive) stocks, which will be weighted downwards, and buy GM at a discount. The capital raising is "oversubscribed" because of this arbitrage opportunity. As a result of the discount, the stock price of GM falls from $30 to $29.50 ($2 times by roughly 25%). GM's stock price falls 0.16% per quarter, and can sustain this rate indefinitely because of passive investors.
In a stock market with active investors, GM's fall in stock price would be a lot more than 50 cents.
Passive investors represent inertia that will keep the current ratios of market capitalisation between companies listed on the stock exchange constant, even if those ratios are suboptimal economically. As a result of the stunted capital allocation, the economy will begin to shrink, over the long run, as it continues to support unprofitable companies by depressing the share prices of the more productive companies, since, ironically, those more productive companies raise much less money than the unprofitable ones, and those capital raisings funded by selling the other companies that aren't raising money.
Truth is that the starting time of an investment determines your results far more than whether you pick active or passive investing.
Word of warning: on a long term graph, today does not look like a good time to start investing, in fact looks like a really good time to sell and stay on the sidelines. This is not affected by passive vs active investing.
Could you expand on what you mean here? Do you mean, that for every day, "today does not look like a good time to start", or do you mean that on this May 4th, 2016, you expect that investments made today, will seem like a bad investment on May 4th 2066? (Or whatever is considered a "long term graph")?
Also if you look at long term history you'd conclude something similar : the US has had a very long (if somewhat disappointing) economic recovery since 2008. We're due a bust.
And finally, the playbook from earlier recessions does appear to be unfolding : manufacturing production has dropped by a lot, and services has flatlined. This is very much like the start of previous recessions. Next up is bad loans to commodity producers (ie. miners) and manufacturers actually going bad (meaning banks declaring losses), then a few defaults, then panic, then recovery.
I would expect index investments made today will seem like bad investments in 10 years. I would never dream of predicting 50 years out. To be fair, I would have told you the same a year ago (not about the recession playbook, but probably everything else listed in this post).
High based on what metric? When I look at this graph, it looks like it's been relatively flat for the last half decade: http://i.imgur.com/3gIwjbh.png
http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#{"ran...
It's up 53% over that 5 year period, for a CAGR of 8.9% (excluding dividends).
"Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement."
When someone picks active management over passive, they are really betting that they can beat, and hence are not, average. It's difficult for people to swallow their hubris, even when simple arithmetic shows them that they are (collectively) wrong.
Also, as I understand it, Berkshire gets to implement management changes (if it deems them necessary) as it wishes, since it owns whole companies, and so the improvements they see could also come from better management of a business rather than picking better businesses. So arguments about average or above average stock picking ability seem less relevant here. (It could well be that Buffett has average management-picking ability, but is one of a relatively small number of market participants who both can and do exercise it, thereby getting an outsize result.)
So if you want to beat the market, your chances are still better in the passive group...
Now, this doesn't take into account getting away with insider trading, of course. If you can get away with insider trading, then you can beat the market just fine.
More importantly, it also doesn't take into account that there are investment opportunities that are not as directly (i.e., without intermediary layers which extract some of the returns) available to passive investors, so that the passive/act groups aren't splitting the same universe of alternatives. (E.g., passively investing in any given index fund is on average better than actively investing restricted to stocks in that index, and you can probably even extend that to passively investing in index funds in generally being better than actively investing in investments that directly held by any combination of index funds, but not every investment vehicle in the market is directly held by index funds.)
Is this really true? I think it's only true if you replace average with median (e.g. in [1,2,3,10] only 10 is above the average).
> [I]f all of the "passive" half have a different random subset, then about half will by definition do "above average", and the other will do "below average". While in the "active group", less than half will do "above average" because they pay part of their gain to fund managers.
So, if all the passive investors have pick a random "large enough" subset of stocks, one would expect the distribution to approach the normal distribution, with roughly half to either side of the arithmetic mean.
Similarly, as you point out, on the "active" side, one might see more outliers - and perhaps the selection isn't really uniformly random.
So, it would probably be a stretch to claim that half will be above average "by definition", even if one includes the expected distribution, while note perhaps entirely wrong.
ISTR a study a few years ago that said the only way you can know for certain that a fund manager is above average is on something like 30+ years of data. There's too much random variation.
I think it was the same article that said the baseball season would need to be several hundred games before you could definitively choose the best team in a given season.
Perfect example: Buffett has always touted value as a great investment strategy, but he completely missed the cocktail of global trade, speed, and scale that have driven Amazon, Google, Uber, Netflix, Apple, etc. to grow revenue and profits so rapidly.
Looking back, I think this shift into a world where it's possible for a company to go from zero to hundreds of millions/yr in net revenue over a span of 4-5 years (Uber) is really going to be seen as some kind of historical turning point in business, on par with the invention of the printing press, or electricity. Companies used to take a century to accomplish growth that's now possible in less than a decade.
Which is all to say, over a long enough timespan, you're talking about a pretty deep and complex philosophical question, what it means to be a "good investor" in the face of so much change, risk, etc. To be honest, I'm not sure it's something that's knowable at all.
There is no real danger that so many people are going to turn passive that it won't work; there are plenty of people out there who think they can do better (and always will be, given human nature), despite the evidence that they won't.
No, it assumes that all assets are passively investable, and each asset is half held by passive investors and half held by active investors. Under any other set of assumptions (particularly, if its just a 50%/50% split of initial market value across all but not each individual investment), the equal-returns conclusion does not hold.
I believe he meant that active fund managers may be able to get positions or create/use instruments that are not available to the general public.
Which kinds of begs the question, how much passive investment can there be, and what is the limiting factor, if not a Grossman-Stiglitz model where 'arbitrage ' (in this context market-making, market-timing etc.) makes prices boundedly efficient, and less arbitrage means higher spreads, less liquidity, less pricing efficiency.
There must be a 'Bernstein peak' and mixed strategy equilibrium, where if you have too much active, expenses are too high, and if you have too little active, liquidity suffers and costs from spreads and volatility are too high.
"[D]iversification is protection against ignorance. It makes little sense if you know what you are doing."
If you own all of the stock in the US, and no-one actively trades in any single stock, how do you know how much one sort of stock is worth against another piece of stock?
I think this eventually drives trading of individual stocks, as the market looks to set prices/trade things this that it thinks are over/under valued.
So I think that it's true that on average an active investor will make less money than a passive one, it's the active one's doing the work/generating the value, as well as giving money to the passive investors!
(presuming rational actors, laws are obeyed etc etc)
If this stuff interests you, I recommend reading the previous post (http://www.philosophicaleconomics.com/2016/05/passive/), which discusses this exact topic.
There is no "correct" price aside from the price set through the market.
And if they put money in from their monthly paycheck, they're placing a buy order.
As long there is a reasonably good balance of buyers and sellers of mutual funds, the underlying securities will find equilibrium.
Read some of the other comments in this thread and you'll see it's not common knowledge either.
This Planet Money episode talks about it in detail.
http://www.npr.org/sections/money/2016/03/04/469247400/episo...
(1) the initial split was formed by splitting each company into halves between the two groups, and
(2) no new companies were ever formed, or, if they are, they are from initiation split ownership exactly 50/50 between actives and inactives.
What is the risk when a large percentage of the middle class and others are all in low fee index funds?
This seems on the surface to be ripe for exploitation in some way, or like we'd be all exposed to the same black swan event and thus potentially trigger another major market event simply because everyone is in the same funds.
I am not a super educated investor so if this is impossible due to the nature of indexes please correct me, but I can't help but feel that this push towards the Bogleheads approach may have the unintended side effect of proverbially putting "all of our investors in one basket."
What are the risks if main street investors truly do shift to this style of investing en masse? It seems that the investments of our middle class and upper middle class would all take big hits at the same time which could cripple the nation moreso than if people were in other investments.
Again, I'm probably missing something here so would appreciate being educated on why my fears are invalid. I haven't been able to find any info on this from googling.
If you can pick an investment that will weather an economic downturn, and still provide a decent return — let me know, because I want to get in on it ;)
Vanguard S&P 500 index fund has $227.5B net assets (across all share classes)[1]. Vanguard Extended Market Index fund (which is the set difference of Vanguard Total Stock Market Index Fund and the S&P 500 fund) has $42.8B net assets (across all share classes)[2].
That is 18.8% of funds in Extended Market. The true ratio is 19% of funds in Extended Market[3]. Not so different.
Now you can argue that funds like the SPYder are the ones which receive a disproportionate share of attention. I would counter that (1) SPY is a smaller fund than Vanguard's (2) How much of that is investors vs. traders who use it for the liquidity.
In conclusion, I'm unconvinced that S&P500 index funds receive a disproportionate share of attention in investment, apart from investment professionals discussions. Even Buffet doesn't appear to care, and may simply use the S&P 500 because it is more well-known:
> Okay, so gold is not a screaming buy to Buffett. What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?
> "Equities," Buffett answers without a moment's hesitation.
> "The VTI?" I ask.
> "That's good enough. Maybe a selection of high-dividend-paying stocks that are likely to raise their dividends. Maybe the top 100 dividend payers of the S&P 500."
>Then, after a second's thought, he adds, "Well, maybe not that, but equities."[4]
[1]: https://personal.vanguard.com/us/funds/snapshot?FundId=0040&...
[2]: https://personal.vanguard.com/us/funds/snapshot?FundId=0098&...
[3]: https://www.bogleheads.org/wiki/Approximating_total_stock_ma...
[4]: http://archive.fortune.com/2010/10/18/pf/investing/buffett_b...
Guess what? Productivity growth has been slowing.
If that were true, then the 64% of actively managed funds would have a clear opportunity to capitalize on this fact for higher returns.
One risk is that index funds aren't really unmanaged, they are managed by people who set and apply rules as to what is included in the index. The greater proportion of total investment that is passively (i.e., without deep research into the practices behind the index) invested in such funds (and, particularly, the proportion that is passively invested in any one such fund), the greater the risk of the rules and practices of setting the index being manipulated.
As a rule of thumb you might assume that if the index goes down, the index fund will add 1-5% going down (large index funds only), and if the index goes up, the index fund will "lose" 0.1-0.5% of that value going up. ETFs are similar. Why ? Lots of reasons:
1) gating (during periods of heavy activity, the adding or removing shares process can block. Additionally, due to new regulation the management of the ETF can impose this without recourse for you. So if the ETF drops 20% in an hour, but you notice this 5% into the drop and want out, chances are good you won't be able to)
2) slippage (due to time delays, contracts, fees, the fact that fractional share ownership doesn't exist, ...) $100 added to an ETF does not result in $100 increase in ETF value. This affects smaller ETFs more than larger ones, but it means that when the S&P 500 goes up 10%, SPY goes up 9.9% or so, when it goes down this makes the drop worse (so, say 10% -> 10.1%). There have been cases where slippage has been large, especially in smaller ETFs).
Note that the reverse is also true, unless you're a billionnair (or at least dozen millionaire). Maintaining "your own", say, SPY equivalent account by owning individual shares will likely cost you more in fees than it would cost you to own the equivalent SPY shares. Additionally if you have less money than the ETF, you'll have to have a rougher approximation.
4) slippage due to add/removes from the S&P 500 index. Since the ETF will have to make suboptimal (very large) trades when the index changes, this will cause the value of the ETF to "slip" compared to the index itself. Putting it separately since it results in bigger amounts.
So the SPY index tracks something between the S&P500 and this list : http://siblisresearch.com/sp-500-additions-removals/
This has, in the past, affected the difference between an S&P 500 index and an ETF more during recessions and that will continue.
5) Global synchronization. Many people use an ETF like SPY as an alternative for a 50% bonds 50% stocks portfolio. Needless to say, this is less diversified, and carries more risk.
6) Generally speaking, an ETF is of course vulnerable to the same risks as the individual stocks, to a lesser extent. However, bad things will happen to the ETF when bad things happen to any large holding. The thing is that the odds go up much faster than I bet people would expect.
Let's say the odds of something really bad (getting economic sanctions, default, bankruptcy, ...) happening to a top-10 S&P 500 company are 1% (happens once every century). We all (should) know the formula that determines risk across SPY as a result of that, but do you know what value it gives for this scenario ?
It's just shy of 10%.
So under these assumptions you can expect a 6-7% drop in the SPY etf every decade that won't be reflected in the index (index can, "for free", just remove failed stocks and replace them, the ETF can't). I hope you agree those are reasonable assumptions.
1. It's really boring. There's no earnings to follow, no products to watch, etc
2. You can't get rich from most indexes. The risk and reward is too low. It's unlikely to invest in a index that gives you a 10x return, though it does happen.
In the end I keep the bulk in a low fee composite index but I like to speculate with a little, even if I invariably lose money on the spec part. It's more fun.
Although picking stocks is still not rational if your only concern is your long run wealth, it's not irrational for the same reason as gambling. It's bad because you have the same expected return as low cost index funds, and you exert effort or pay fees for the privilege. That doesn't mean I look down on everyone who actively invests though-- they may have good reason to think they are special and can pick stocks better than average or they may just enjoy it, as the person to whom you responded said he did. And then it would be rational to actively invest at least some of the time.
Index funds, however, do have +EV.
I guess im just too cynical to believe a company can operate indefinitely with indefinite growth!
For me I don't care about #2. If you had the most boring investment in the world that returned exactly 7% every single year I would put 90% of my assets there immediately. But I'd keep trying to beat that 7% in my casino fund.
Average return from S&P500 from 1928-2015 is 11.41% [ source : http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... ]
Note that this is not inflation adjusted; inflation is about 3.4% historically.
It'd take a little over 21 years to get a nominal 10x return at 11.4% average return.
From 1928-2015, of the 88 years, 24 were down years. Probability of a down year is 27%
Some people say lottery tickets are the highest risk portion of the portfolio, but for people who like looking at numbers as you're describing, I think this is a better option.
It's really a joke for this portfolio from some TV gurus from that time around '99, as every "blue chip" companies on the list mostly worth significant lower in '16 from their '99-00 heights: >-50%+ INTC, CSCO, YHOO (not to mentions it's on the selling block). Maybe MSFT is an exception. Those high-risk bets? more like busts: astroturf (?, never heard of it), IOM (from $100 to $3.56 when acq'd by EMC), JDSU (from ~$300 to $6 as VIAV and $25 as LITE). I really do not see what growth in such portfolio.
This just reminds me the moment that Jim Cramer and other pundits on TV urging investors to buy and hold Lehman Brothers stocks before its fall in '08 "because it's too big to fail".
There is no law of physics/economics that says the S&P500 has to rise at x% a year on average.
If they are not the same, then past performance may be a very bad predictor. But even in that case it is hard to imagine I'd do better by picking individual stocks unless I start researching companies as a full-time job.
Whole point of indexed funds is match the market. If you feel that as an investor you're able to beat the market, which includes indexed funds, good luck.
"Fool and their money are soon parted."
There's no reason an "active" manager can't just select x00 companies by some criteria, publish that list and then just invest in that basket with modest adjustments?
At this point, the primary advantage that "passive" management has is extraordinary marketing, mainly through the selection of S&P 500 components.
1. Actively managed funds diversified across equitieis, bonds, cash, etc
2. Index funds for specific indices, such as "top 4,000 US companies"
The danger with 2, they say, is you're not diversified. That'll be up to me I suppose to try to diversity into other areas.
The real lack of diversity is that it's weighted towards US companies which some people have decided they want and others don't, and apparently it's weighted towards stocks as an asset class as well.
I don't think weighting is the same as lacking diversification, although certainly you are lacking one kind of diversification.
Or, if one is of the "stocks don't go up over the long term" persuasion, it means stocks + shorts (for a net market neutral portfolio) and bonds.
So no, popular index funds are not diversified. There are exceptions, of course.
When markets make a downturn, passive investing is not a great idea.
The best policy is to put money in the market every month, through the best and worst of it, especially if you're young.
This doesn't happen only because of panic.
In a recession, by definition, bad things happen: people lose cushy jobs, they end up uninsured just before an illness happens, very close relatives (parents, kids) fall on hard times them-selves and you have to bail them out etc etc. All these new problems require liquidity, which can be very easily obtained by selling your stocks, even if at a loss. Multiply this across the whole middle-class and the end-result won't be pretty.
Unexpected expense? Dig yourself deeper and push your credit closer to its limit.
Personally I think that is the intention of credit cards -- emergency liquidity -- and that nobody should carry credit card debt to the next month.
I should have mentioned that investing comes with the caveat that one should also have a plan for major life events like a job loss. Having 6+ months of living expenses on hand in cash is a must. I firmly believe that 70%+ of the stress and anxiety of losing one's job is the pressing need for cash flow. I can't imagine the kind of stress that produces for someone who lives paycheck to paycheck.
That brings me to a larger (slightly off-topic) point: people don't save enough money. 10% is the absolutely minimum one should be saving, despite that being the common advice which no one follows. Most people, even high-earners, spend nearly all of their money. There are tons of people out there making $75k+ per year who are a couple paychecks from being on the street. Those people are simply doing it wrong and will absolutely get bit in a down market.
For those still reading, do this: Get an emergency fund that you can live on for 6+ months. Pay off your debts. Contribute to your IRA, 401k, or whatever else, putting all of that money into a boring index fund that tracks the market (I like VTSAX because Vanguard's fees are incredibly low). Make sure at least 20% of your money is invested. The only people who this might not work for are those earning at or near minimum wage with dependents. If you're not in that group, just do it. You do not need that 20% of your money right now. You may think you do, but you don't. You're spending money on stuff you don't need.
My apologies for getting so far off topic. This is just something I feel very passionately about.
Why keep stocks over cash? Even if they don't appreciate, or even if it is a down year, they still pay dividends which can be reinvested.
You stick $10k in the market when shares are $10 each. This means you get 1000 shares. Then the market crashes and now those 1000 shares are worth $5k. Normally this would be fine; you know the market will rebound eventually. Then you lose your job and have no cash on hand.
You're out of the job for a few months, and you slowly sell your shares until you find a new job. Say it takes $4k to keep you afloat for a few months. You now have $1k left in the market, 200 shares. That $4k of spending actually cost you $8k. Though the market rebounds eventually and your remaining 200 shares are worth the $2k they originally were, you're still $8k short and you always will be. That money is gone. It would've taken more than 20 years for inflation to turn $8k in cash into $4k.
In short, cash is a cheap hedge against some bad luck eating up your investments. The inflation that slowly devalues your cash is a much more acceptable risk than the one I describe. Markets can be rough in the short term. It's easy to hedge against them. Do it.
Also your example assumes that all the shares were bought at the same time and declined 50%. If you've been investing for years, the value of your gains/losses wouldn't simply be a "market crash" it would include the price at which you bought the stock at plus any dividends you reinvested. So a 50% downturn from a certain high point could be much less from how much capital you initially committed. Add to that you can take capital losses as a way to reduce tax liability in a given year.
There's enough ways to hedge without having too high of a cash drag.
I'd be surprised if the combination of the effort it takes and the fees that are charged are less than that for your method.
That being said, it's sounds like you have a firm grasp on your system and it works for you. That's much more than can be said for a vast majority of people.
Part of the problem, I think, is instant gratification -- the younger generation, especially, wants everything NOW. I'm guilty of this as well, running out to order the newest tech gadgets. She sees me doing this and wants to do it as well, not really realizing that I can do that a little easier because I make multiple times what she does.
There was a time not long ago when I would have been screwed if I had suddenly lost my job. Fortunately, if that happened today I could enjoy a few months off before even starting to look for new employment, let alone stressing about how to pay my bills. The difference in anxiety / stress levels is astounding.