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Investing in total market index funds is literally investing in the economy as a whole. (Or as much of a whole as the index represents.) So while yes, they will crash with future market crashes, of which there will be many in each of our lifetimes, historically in the U.S. so far the market has always recovered.

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"historically in the U.S. so far the market has always recovered."

This is sorta enshrining survivorship bias in your premises - take the largest economy around today and point out that every time it's crashed, it's recovered. Well, if it hadn't, there wouldn't be anything to point at.

There are actually plenty of examples - even among European settlers of the Americas - where the economy did not recover. The Continental Congress and the monetary system setup under it failed through hyperinflation, leading to the expression "not worth a Continental", and then the country had to be rebooted under the U.S. Constitution. Similarly, plantation owners in the Confederate States of America were totally wiped out - not only was the currency debased, the infrastructure destroyed, and the plantations burned, but the whole legal framework under which the plantation system operated was rewritten.

Yes, it's an imperfect predictor of the future. No one else does a very good job predicting economic futures either, however.

But you are comparing with fledgling/emerging markets. Samples of failures at this point to scare people should be declines of economies established for more than a hundred years. The falls of empires, etc. Those are what are relevant to the current US investor.

What percentage of 'the economy' do you think is represented by publicly traded corporations?

According to this article [1], public firms account for about 80% of the pre-tax profit in the private sector. That's probably enough, given that public and private company returns are probably at least somewhat correlated.

[1]: https://www.forbes.com/sites/sageworks/2012/09/21/private-co...

The P in GDP does not stand for Profit. An economy consists of a lot more than private sector profits.

Right. But I'd wager that index fund investors are more interested in profits than GDP, at least as it relates to their investments and the proposition at the top of this thread that index funds will be "ripped" (presumably disproportionately) in the next downturn.

Right. If you have a wide market downturn, all of the "active investors" are going to take their money out as cash and wait to buy and the "passive investors "are going to take a bath.

The mistake that index fund adherents make is that there is no such thing as passive investing.

Certain market participants have been screaming about this fact to anyone who will listen for 2+ years now.

> Certain market participants have been screaming about this fact to anyone who will listen for 2+ years now.

There's an alarming amount of overlap between the groups: "claim that passive investing will underperform," and "make money when people actively invest."

First, it's literally impossible for all of the "active investors" to take their money out as cash; some active investors can cash out by selling all their stock to other active investors who think that this is a good time to buy more stock; passive investors would/could only absorb that amount of stock at the speed of new passive capital coming in, which is gradual, not that large (compared to the flows of active investors) and would likely slow down somewhat in a market downturn.

Furthermore, how exactly are "passive investors" going to take a bath? They're simply making a very long term bull market bet; if DJI drops 50%, it's the active investors that might sell at this price, but the index funds will just keep their position until (and after) it recovers, the only case where they'll lose in the long run is if the DJI drops permanently and that doesn't seem plausible outside of ww3 scenarios.

I mean, there's some causality there; when the active investors try to take their money out as cash all at once, it does tend to have negative effects on the market. but... I think that, generally speaking, the goal of your active investors is to buy during the downturn, and sell into the upturn.

Buy low, sell high; not the other way around.

I mean, that's the goal. Of course, it doesn't always work out that way, but you don't plan on selling at the bottom and buying as it recovers.

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