Maybe we'll finally find the argument against index funds: when the majority of market power is essentially in auto-pilot, it can't steer out of a crash.
It's crazy to think that we can look at the market and opine over the lack of animal spirits.
It's crazy to think that we can look at the market and opine over the lack of animal spirits.
The last one needs explanation. Suppose indexers think they should own 10% of your company. Issue stock, and "sell" that stock in a self-dealing manner at current market prices. Indexers now should buy stock, since your company is bigger on paper (more shares outstanding at the same price). In the degenerate case, >90% of the stock isn't actually available for sale on the public markets, and the indexers have to buy literally more shares than they can buy.
Note that this pattern of strategies happens organically. Whenever there's a population filled with agents that pay costs to enforce rules, there's a superior local strategy of free-riding on their rule enforcement, since defectors cannot operate in a enforcer-heavy environment. This also is what'll cause a drop in index funds - wide-scale losses due to fraud and prices temporarily disconnected from fundamentals.
i like to believe indexers are not that easily fooled.
broad market indexers (think 2-5k stocks like the russell) normally use an approximation portfolio that holds significantly fewer assets in order to minimize transaction cost. the correlation between a 500-asset portfolio and a 5000-asset portfolio is something like 98%, maybe more. a lot of replication portfolios don't even bother with the underlying nowadays, they just load up on cash settled equity swaps with the dealers and let them deal with the basis.
and narrow market indexers track indices that won't bother including corporates with tiny floats.
In the dot com bubble, not everything popped. Many stocks went up as people fled tech and went into "safer" sectors. So it does seem that broad index hegemony has the potential to exacerbate a nasty crash.
Stay the course.
As an individual, they are obviously the best bet. But I'm just trying to read in some possible externalities.