If everyone indexes, there is no trading and no market.
I index, but I trade every time a paycheck comes in. Every time a dividend is reinvested. When I get paid for my side job. It is always total stock market, but I trade. I only buy, since I am in the accumulation phase.
Plenty of people and companies sell for inverse reason. Retirees have to take distributions from retirement funds. They may need to liquidate to pay for their expenses. People of all ages sell stock to invest in something else, like a house. Businesses may finance expansion in part with stock sales. Both may sell to pay taxes or other costs.
Now you have indexers selling and indexers buying. Plenty of trading, but no active management.
People who are compensated in company stock have to sell it, trade, in order to buy total stock market, trading again. They may be purely passive, but their compensation scheme forces them to regularly trade to maintain their passive portfolios.
None of this has anything to do with attempting to predict prices of individual stocks or the entire market.
It is hardly true that a market in which all investors index would have no trading. If they all used the same total stock market proxy, then the only thing that would trade would be blocks of the total market. There would still be trading. But more likely different entities would trade different versions of the total market. Some would face different expenses than others. Some may be constrained in the mix of securities they can hold. The fund managers could vary in their use of futures and options to remain fully invested while minimizing costs. That would involve different approaches than complete replication at every moment in time.
All of that is before one considers those who emphasize only part of the market. They might say they are passive although I would disagree.
One can have 100% passive and still lots of trading.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either |
We assume that markets are efficient, that prices are right |