What will happen if everyone indexed?

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rockfuture
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What will happen if everyone indexed?

Post by rockfuture »

Can somebody told me what if everyone indexed? Will it lead to crisis? I ask this since John Bogle has a warning for index fund investor:
“If everybody indexed, the only word you could use is chaos, catastrophe,” Bogle told Yahoo Finance at the Berkshire Hathaway annual meeting last month. “The markets would fail,”
Any thought about this?
The Wizard
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Re: What will happen if everyone indexed?

Post by The Wizard »

We'll all be rich after a few decades?
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Phineas J. Whoopee
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Re: What will happen if everyone indexed?

Post by Phineas J. Whoopee »

There are structural reasons it will never happen. If so many people indexed that price discovery broke down and markets became informationally inefficient it would tempt investors to become active, and an equilibrium would be established.

That's a question posed again and again in the press by people whose livelihoods are threatened by investors adopting a passive approach. Such investors are nowhere near a majority yet, and may never be.

Being new you may not know, but it's best to search the forum to see if a topic has come up before. In this case it has, seemingly weekly. Here's the relevant search so you can read past threads: What if everybody indexed?

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Last edited by Phineas J. Whoopee on Wed Jan 17, 2018 10:13 pm, edited 1 time in total.
MadDwag
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Re: What will happen if everyone indexed?

Post by MadDwag »

Corporate earnings would continue to rise and the stock prices (and therefore indexes...indices?) would go up. Relax and enjoy the ride.
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Phineas J. Whoopee
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Re: What will happen if everyone indexed?

Post by Phineas J. Whoopee »

MadDwag wrote: Wed Jan 17, 2018 10:12 pm Corporate earnings would continue to rise and the stock prices (and therefore indexes...indices?) would go up. Relax and enjoy the ride.
Actually not, under the posited conditions. There would be no price discovery, therefore no reason for prices to move in any particular direction regardless of earnings. As I posted above, structurally it can never happen. The question is brought up again and again in the press by people panicking because they don't know where next month's boat payment is coming from.

Person who doesn't know where next month's boat payment is coming from: What if I told you I knew a way for you to beat the market consistently, which those other fools, unlike intelligent people like you, never will?

The correct answer is:
Why? Are you likely to say such a thing?

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H-Town
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Re: What will happen if everyone indexed?

Post by H-Town »

rockfuture wrote: Wed Jan 17, 2018 9:56 pm Can somebody told me what if everyone indexed? Will it lead to crisis? I ask this since John Bogle has a warning for index fund investor:
“If everybody indexed, the only word you could use is chaos, catastrophe,” Bogle told Yahoo Finance at the Berkshire Hathaway annual meeting last month. “The markets would fail,”
Any thought about this?
Think about it: if there were a world where everyone is indexing, I would be happy and pick stocks on my own to beat the market. And then there would be the next guy who is greedy enough to go against me because he thinks he can one up on me. On it goes... It's human race :oops:
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Re: What will happen if everyone indexed?

Post by bkweathe »

1. I think you've taken Bogle's quote out of context. It wasn't a warning; it was a response to a hypothetical question. Bogle knows it won't happen because ...
2. If everyone indexed, inefficiencies would develop. People would start trading those securities that they believed were over- or under-priced. BOOM! Not everyone is indexing anymore.

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Re: What will happen if everyone indexed?

Post by Agggm »

rockfuture wrote: Wed Jan 17, 2018 9:56 pm Can somebody told me what if everyone indexed? Will it lead to crisis? I ask this since John Bogle has a warning for index fund investor:
“If everybody indexed, the only word you could use is chaos, catastrophe,” Bogle told Yahoo Finance at the Berkshire Hathaway annual meeting last month. “The markets would fail,”
Any thought about this?
Indexing works well IFF (not if) efficient markets exist. Markets become efficient when many smart people analyse it.
If no one analyzed, no one picked winners or losers, on a number of basis, markets would stop being efficient. Then indexing would'nt work.

I'm curious to know what is the equilibrium indexing/active time vector.
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Phineas J. Whoopee
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Re: What will happen if everyone indexed?

Post by Phineas J. Whoopee »

Agggm wrote: Wed Jan 17, 2018 11:21 pm ...
Indexing works well IFF (not if) efficient markets exist. Markets become efficient when many smart people analyse it.
If no one analyzed, no one picked winners or losers, on a number of basis, markets would stop being efficient. Then indexing would'nt work.
It may make no difference to the point, but I know IFF as <if and only if>, not <not if>.

Why do you say indexing wouldn't work? Are you saying it would not provide the market return, however informationally inefficient it might be, less very low costs? What do you expect from indexing, that it wouldn't do that?
Agggm wrote: Wed Jan 17, 2018 11:21 pmI'm curious to know what is the equilibrium indexing/active time vector.
It would be all but immediate. Do you think all the firms and people pouring their money, time, and attention out to eke a tiny advantage over others on every one of millions of trades wouldn't notice if a market opportunity suddenly opened up? Of course they would. I say all but immediate because it wouldn't take zero time. It would take positive time, measured in microseconds. That's not a typo. Micro, not milli. That's the timeframe relevant at the margin today.

The vast majority of trading isn't among individual investors. It's among cut-throat firms out to eat one anothers' lunches. They will notice. Most likely, they'll never begin indexing to start with. They have to believe, or at least behave as if they do, their firms' huge investments in technology and talent will pay off.

The efficient market hypothesis does not claim nobody can access, analyze, and act on information faster, or better, than anybody else. I wrote about it here.

As a hypothetical, everybody indexing will never happen because of the structural reasons I and others posted upthread. In terms of timing, how long would it take you, if you could do so within microseconds, to exploit an arbitrage opportunity?

Instantaneous? No. Disadvantaged relative to your competitors by the speed of light in a fiber optic cable? Also no, because they and you are paying high rent to place your servers right next to the trading venue. It sends the information to everybody at the same time, but your and your close competitors' servers are as physically close as they can get. Anybody can do it, if they raise enough capital.

Microseconds, not milli.

For convenience I'll repeat the link I posted upthread: What if everybody indexed?

PJW
Last edited by Phineas J. Whoopee on Thu Jan 18, 2018 12:49 am, edited 1 time in total.
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Re: What will happen if everyone indexed?

Post by bottlecap »

The worse case scenario would be that the some good active funds would start regularly beating indexing. I think theory-wise it’s been explained many times why that won’t happen, but that’s your worse case. The moon will not crash into the Earth or anything.

However, if you live long enough for that to occur, you'll have much bigger problems. You’ll be in a government lab in Nevada where scientists prod you until they figure out why you haven’t died like the rest of us.

We need a sticky or something. This question is coming up every few days! Is it a variation of the old argument from actiive proponents that indexing isn't fair because it’s "free loading?” John Bogle is feeding this fear!?!

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Phineas J. Whoopee
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Re: What will happen if everyone indexed?

Post by Phineas J. Whoopee »

bottlecap wrote: Thu Jan 18, 2018 12:46 am ...
We need a sticky or something. This question is coming up every few days! Is it a variation of the old argument from actiive proponents that indexing isn't fair because it’s "free loading?”
...
So far as I can tell it's no variation. It is the argument, made over and over, as if it were a moral principle, that the world owes the croupiers their next month's boat payment. I don't think we can blame posters for coming here to ask what we think of it.

Even if there were a sticky, in light of the Ford F-150 and Chevy Like a Rock onslaught I don't see how it would stick.

What if everybody indexed?

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Re: What will happen if everyone indexed?

Post by Call_Me_Op »

rockfuture wrote: Wed Jan 17, 2018 9:56 pm Can somebody told me what if everyone indexed? Will it lead to crisis?
Why worry about something that will never happen? This is an extreme and unrealistic scenario.
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Re: What will happen if everyone indexed?

Post by bertilak »

rockfuture wrote: Wed Jan 17, 2018 9:56 pm Can somebody told me what if everyone indexed? Will it lead to crisis? I ask this since John Bogle has a warning for index fund investor:
“If everybody indexed, the only word you could use is chaos, catastrophe,” Bogle told Yahoo Finance at the Berkshire Hathaway annual meeting last month. “The markets would fail,”
Any thought about this?
Given human nature, market inefficiencies will always be sought out, noticed, and acted upon -- the very thing that is already (and continuously) going on today. It is called price discovery. Long before we got to the point where "everybody indexed" those inefficiencies would become glaringly obvious and people would be trampling all over each other to pick up the under-priced stocks (thereby pushing up the price). The more sophisticated would be short-selling the over-priced stocks.

The question is a little like "What if everyone stopped breathing?" Bogle's answer to that hypothetical question might have been "Everyone would die." That sounds catastrophic but it is not something to worry about. Ain't gonna happen -- human nature doesn't allow it.

Think of the thermostat for your furnace. It kicks in even at the hint of things cooling off. It doesn't wait for the pipes to freeze. In the same way, price discovery kicks in even at the hint of a mispriced stock.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
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Re: What will happen if everyone indexed?

Post by bogglizer »

Use some math. If no one indexes, then each dollar in the market as $1 of choice available in how it is to be invested. If 50% of the market is indexed, then the remaining 50% of the market has $1 shares that have $2's of choice available. If I, as a non-indexed investor, make a decision, it has twice as much effect as if there were no investors. So if nearly 100% of the market is indexed, then each choice decision, no matter how small, will have a leveraged, enormous effect on the stock prices. This causes an increase in volatility, because there is no averaging of many small decisions (go read the article on shot noise at wikipedia). Increased volatility makes stocks a less appealing investment, so stock prices will drop as people invest elsewhere, looking for the efficient frontier. I conclude that indexing decreases stock prices.

Ha!
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Phineas J. Whoopee
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Re: What will happen if everyone indexed?

Post by Phineas J. Whoopee »

bogglizer wrote: Thu Jan 18, 2018 8:50 am ...
Ha!
Except for market structure. I wrote about it in the middle of this post.

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Re: What will happen if everyone indexed?

Post by Agggm »

Phineas J. Whoopee wrote: Wed Jan 17, 2018 11:58 pm
Agggm wrote: Wed Jan 17, 2018 11:21 pm ...
Indexing works well IFF (not if) efficient markets exist. Markets become efficient when many smart people analyse it.
If no one analyzed, no one picked winners or losers, on a number of basis, markets would stop being efficient. Then indexing would'nt work.
It may make no difference to the point, but I know IFF as <if and only if>, not <not if>.

Why do you say indexing wouldn't work? Are you saying it would not provide the market return, however informationally inefficient it might be, less very low costs? What do you expect from indexing, that it wouldn't do that?
Agggm wrote: Wed Jan 17, 2018 11:21 pmI'm curious to know what is the equilibrium indexing/active time vector.
It would be all but immediate. Do you think all the firms and people pouring their money, time, and attention out to eke a tiny advantage over others on every one of millions of trades wouldn't notice if a market opportunity suddenly opened up? Of course they would. I say all but immediate because it wouldn't take zero time. It would take positive time, measured in microseconds. That's not a typo. Micro, not milli. That's the timeframe relevant at the margin today.

The vast majority of trading isn't among individual investors. It's among cut-throat firms out to eat one anothers' lunches. They will notice. Most likely, they'll never begin indexing to start with. They have to believe, or at least behave as if they do, their firms' huge investments in technology and talent will pay off.

The efficient market hypothesis does not claim nobody can access, analyze, and act on information faster, or better, than anybody else. I wrote about it here.

As a hypothetical, everybody indexing will never happen because of the structural reasons I and others posted upthread. In terms of timing, how long would it take you, if you could do so within microseconds, to exploit an arbitrage opportunity?

Instantaneous? No. Disadvantaged relative to your competitors by the speed of light in a fiber optic cable? Also no, because they and you are paying high rent to place your servers right next to the trading venue. It sends the information to everybody at the same time, but your and your close competitors' servers are as physically close as they can get. Anybody can do it, if they raise enough capital.

Microseconds, not milli.

For convenience I'll repeat the link I posted upthread: What if everybody indexed?

PJW
I meant IFF as if and only if and specified that I don't mean if. Sorry for the confusion.

To clarify "doesn't work" doesn't mean won't return market return (although the tracking error would be big), but to say that the few active investors would be a better way to access such a market.
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Re: What will happen if everyone indexed?

Post by David Jay »

Agggm wrote: Thu Jan 18, 2018 3:31 pm
Phineas J. Whoopee wrote: Wed Jan 17, 2018 11:58 pm
Agggm wrote: Wed Jan 17, 2018 11:21 pm ...
Indexing works well IFF (not if) efficient markets exist. Markets become efficient when many smart people analyse it.
If no one analyzed, no one picked winners or losers, on a number of basis, markets would stop being efficient. Then indexing would'nt work.
It may make no difference to the point, but I know IFF as <if and only if>, not <not if>.

Why do you say indexing wouldn't work? Are you saying it would not provide the market return, however informationally inefficient it might be, less very low costs? What do you expect from indexing, that it wouldn't do that?
Agggm wrote: Wed Jan 17, 2018 11:21 pmI'm curious to know what is the equilibrium indexing/active time vector.
It would be all but immediate. Do you think all the firms and people pouring their money, time, and attention out to eke a tiny advantage over others on every one of millions of trades wouldn't notice if a market opportunity suddenly opened up? Of course they would. I say all but immediate because it wouldn't take zero time. It would take positive time, measured in microseconds. That's not a typo. Micro, not milli. That's the timeframe relevant at the margin today.

The vast majority of trading isn't among individual investors. It's among cut-throat firms out to eat one anothers' lunches. They will notice. Most likely, they'll never begin indexing to start with. They have to believe, or at least behave as if they do, their firms' huge investments in technology and talent will pay off.

The efficient market hypothesis does not claim nobody can access, analyze, and act on information faster, or better, than anybody else. I wrote about it here.

As a hypothetical, everybody indexing will never happen because of the structural reasons I and others posted upthread. In terms of timing, how long would it take you, if you could do so within microseconds, to exploit an arbitrage opportunity?

Instantaneous? No. Disadvantaged relative to your competitors by the speed of light in a fiber optic cable? Also no, because they and you are paying high rent to place your servers right next to the trading venue. It sends the information to everybody at the same time, but your and your close competitors' servers are as physically close as they can get. Anybody can do it, if they raise enough capital.

Microseconds, not milli.

For convenience I'll repeat the link I posted upthread: What if everybody indexed?

PJW
I meant IFF as if and only if and specified that I don't mean if. Sorry for the confusion.

To clarify "doesn't work" doesn't mean won't return market return (although the tracking error would be big), but to say that the few active investors would be a better way to access such a market.
Ag:

I think bottle cap has it about right:
bottlecap wrote: Thu Jan 18, 2018 12:46 amThe worse case scenario would be that the some good active funds would start regularly beating indexing. I think theory-wise it’s been explained many times why that won’t happen, but that’s your worse case.
So when the SPIVA scorecard has active managers beating index funds 40% of the time, I will start evaluating active funds (active beats passive only about 20% of the time now).

Actually, I personally would use this as an indicator that I should go back to being an individual stock picker, which I was doing in past decades.
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Re: What will happen if everyone indexed?

Post by Agggm »

David Jay wrote: Thu Jan 18, 2018 6:50 pm
Agggm wrote: Thu Jan 18, 2018 3:31 pm
Phineas J. Whoopee wrote: Wed Jan 17, 2018 11:58 pm
Agggm wrote: Wed Jan 17, 2018 11:21 pm ...
Indexing works well IFF (not if) efficient markets exist. Markets become efficient when many smart people analyse it.
If no one analyzed, no one picked winners or losers, on a number of basis, markets would stop being efficient. Then indexing would'nt work.
It may make no difference to the point, but I know IFF as <if and only if>, not <not if>.

Why do you say indexing wouldn't work? Are you saying it would not provide the market return, however informationally inefficient it might be, less very low costs? What do you expect from indexing, that it wouldn't do that?
Agggm wrote: Wed Jan 17, 2018 11:21 pmI'm curious to know what is the equilibrium indexing/active time vector.
It would be all but immediate. Do you think all the firms and people pouring their money, time, and attention out to eke a tiny advantage over others on every one of millions of trades wouldn't notice if a market opportunity suddenly opened up? Of course they would. I say all but immediate because it wouldn't take zero time. It would take positive time, measured in microseconds. That's not a typo. Micro, not milli. That's the timeframe relevant at the margin today.

The vast majority of trading isn't among individual investors. It's among cut-throat firms out to eat one anothers' lunches. They will notice. Most likely, they'll never begin indexing to start with. They have to believe, or at least behave as if they do, their firms' huge investments in technology and talent will pay off.

The efficient market hypothesis does not claim nobody can access, analyze, and act on information faster, or better, than anybody else. I wrote about it here.

As a hypothetical, everybody indexing will never happen because of the structural reasons I and others posted upthread. In terms of timing, how long would it take you, if you could do so within microseconds, to exploit an arbitrage opportunity?

Instantaneous? No. Disadvantaged relative to your competitors by the speed of light in a fiber optic cable? Also no, because they and you are paying high rent to place your servers right next to the trading venue. It sends the information to everybody at the same time, but your and your close competitors' servers are as physically close as they can get. Anybody can do it, if they raise enough capital.

Microseconds, not milli.

For convenience I'll repeat the link I posted upthread: What if everybody indexed?

PJW
I meant IFF as if and only if and specified that I don't mean if. Sorry for the confusion.

To clarify "doesn't work" doesn't mean won't return market return (although the tracking error would be big), but to say that the few active investors would be a better way to access such a market.
Ag:

I think bottle cap has it about right:
bottlecap wrote: Thu Jan 18, 2018 12:46 amThe worse case scenario would be that the some good active funds would start regularly beating indexing. I think theory-wise it’s been explained many times why that won’t happen, but that’s your worse case.
So when the SPIVA scorecard has active managers beating index funds 40% of the time, I will start evaluating active funds (active beats passive only about 20% of the time now).

Actually, I personally would use this as an indicator that I should go back to being an individual stock picker, which I was doing in past decades.
Been referring to inefficient markets. The US market is very efficient.
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Re: What will happen if everyone indexed?

Post by uberational44 »

I think there could be a worse scenario in which index investors who don't really understand indexing rush out of the market with the herd during some sort of crisis. Although in this scenario, if you bought more when the price went down, you would be able to get out of the market unscathed...

I agree that full indexing will never happen. But we could easily get to a stage where ai and machine learning programmes allocate capital efficiently as is happening with rise and rise of quant hedge funds today!
Marketeer investing as a hobby. Interested in modern takes on value investing, passive investing and general contrarianism.
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Re: What will happen if everyone indexed?

Post by flamesabers »

rockfuture wrote: Wed Jan 17, 2018 9:56 pmCan somebody told me what if everyone indexed? Will it lead to crisis?
So long as there is a significant amount of diversity in terms of behavior and preferences with investing, I consider it practically impossible for everyone to index. Not everyone is content with just buying and holding the same index funds until retirement. Not everyone is going to react the same if the value of a company's stock skyrockets or if the market crashes suddenly.
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Re: What will happen if everyone indexed?

Post by Nate79 »

The same thing will happen when this question is asked in the 1000 other threads on the topic. I suggest a basic search next time for a topic that is probably discussed weekly.
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Re: What will happen if everyone indexed?

Post by nisiprius »

I believe:

If 100% of all stock investors index, literally all, with nobody but index funds buying or selling stocks, there will be chaos.

If 90% of all retail (non-institutional) stock investors index, there will be no bad effects at all, none whatsoever, on the market or on indexers. The efficiency of the market will be improved by the removal of people who cannot judge value from the price discovery process. Because indexing merely removes things from the market that have the same composition as the market, it does not making things more difficult and is not unfair in any way, to whose who chose the index... just as removing a bucket of seawater, or a billion buckets of seawater, from the sea, does make the sea any saltier or less salty. The only bad effects are on people who make their living by selling non-index investments.

The "what if everybody indexed?" argument is a standard (and invalid) talking point against indexing. And even if were valid, you do not have any sacred obligation to Adam Smith to make the market work. Do what's in your own self-interest and let the market solve its own problems.

Think about supermarkets. When you go to a supermarket to buy food, do you spend time at the checkout counter negotiating the price of every item you've bought, or do you just shrug and pay the labeled price without arguing? Do people just paying the listed price for groceries, without haggling, cause chaos in the supermarket industry or prevent it from functioning efficiently?
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Re: What will happen if everyone indexed?

Post by bogglizer »

Phineas J. Whoopee wrote: Thu Jan 18, 2018 1:20 pm
bogglizer wrote: Thu Jan 18, 2018 8:50 am ...
Ha!
Except for market structure. I wrote about it in the middle of this post.

PJW
The market timing argument may not work as well as you think it does, since indexers are not required to actually buy and trade all stocks. They only are required to emulate their chosen index as close as possible by holding a similar basket of stocks. Since the indices themselves would be reduced by market timing, the index funds would not see a drop in value. Besides, your argument goes in the same direction as mine - lower returns. Mine is just sillier.
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Re: What will happen if everyone indexed?

Post by bertilak »

nisiprius wrote: Fri Jan 19, 2018 12:36 pm The "what if everybody indexed?" argument is a standard (and invalid) talking point against indexing. And even if were valid, you do not have any sacred obligation to Adam Smith to make the market work. Do what's in your own self-interest and let the market solve its own problems.
Even if we did feel obliged to "do our part" in the interest of price discovery, our inept attempts would mostly do more harm than good!
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