Are We Headed For A Passive Index Meltdown?

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stemikger
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Re: Are We Headed For A Passive Index Meltdown?

Post by stemikger » Sat Sep 22, 2018 11:00 am

EyeYield wrote:
Thu Sep 20, 2018 8:44 am
If everybody got in their cars and drove at the same time, we would be headed for a transportation meltdown.
If everyone flushed their toilet at the same time, we would have a serious water drought.

Some things are not worth worrying about.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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bertilak
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Re: Are We Headed For A Passive Index Meltdown?

Post by bertilak » Sat Sep 22, 2018 11:16 am

If an index fund looses value, it is not because of some mysterious attribute of index funds. It is because the assets it holds have lost value and that loss will be felt by all who hold those assets, not just the indexers.

By definition, index investors will hold those same assets in the same proportions as all other investors. The indexers will not feel the loss any more (nor less) than the non-indexers.

If "everybody" indexed, any market inefficiencies caused by that will be a BIG opening (and incentive) for smart investors to jump off the indexing bandwagon. That will actually happen long before we get to "everybody."
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

gmaynardkrebs
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Re: Are We Headed For A Passive Index Meltdown?

Post by gmaynardkrebs » Sat Sep 22, 2018 11:27 am

GrowthSeeker wrote:
Sat Sep 22, 2018 10:08 am
Here is a related thought: Smart Money vs Dumb Money
In the classic financial planning doctrine, those 2% fee money managers and active fund managers are really, really smart because they beat the market so well. But individual schlubs like you and me are dumb. Except that is isn't really that way. It's not really clear to me who is Smart and who is Dumb.

But with index investing we have a kind of Neutral Money.
Here's a question: as more money moves into index funds, is money flowing more from Smart Money to Neutral Money or from Dumb money to Neutral Money? I ask this not to be off topic but wondering if looking at it this way helps predict whether the shift to index funds over time would produce a meltdown (which I personally doubt very much) or the opposite of a meltdown.
It's a tough question to answer, in part because we don't know how much of the "smart money"/"active money" has moved off of the public markets in recent years. I have a concern that private equity and other forms of non-public investing may be skimming the best assets off of the public markets that we use. It may be more than is going to passive.

Sailorgirl
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Re: Are We Headed For A Passive Index Meltdown?

Post by Sailorgirl » Sat Sep 22, 2018 6:41 pm

This is my first time posting. I have been following boggleheads for about a year now and have learned so much from posters on this forum. My DH is retiring in 10 months. We are trying hard to get it right. We all know a downturn is coming. None of us know when. Our portfolio is large and tied up in our 401k. We are trying to be prudent. Fear is a very real irrational emotion. I know I have had it in the past. Trying not to be tied to it in the future. That’s why we have been working thanks to many here on “Our Plan”.

Passive investing (MF and ETF’s) has grown from 3% AUM in 1995, 14% in 2005 To 37% of all AUM as of December 2017. Passive funds now hold 14% of the total equity market. Most passive investors are small investors, Some investors are properly allocated for risk. Most are not. Very few people understand that you can not time the market and most people are terrified of loosing what little they have managed to save. (80% of retirement investors have less than I years income in retirement savings.) There are 90 million people over 55 and half of these people have no retirement savings or savings what so ever. 1% of the population owns 85% of the nations wealth. What happens when they decide it’s time to take their profits. Fear is an emotion that is hard to control. Logic has no part in it that is why it’s so important to have a plan.

The FED and others are fearfull of a big selloff (profit taking) in technology and other high profile stocks, which will kick in algorithms which will add to the sell off, which will result in the small investor selling on fear. The market is overbought everyone knows it.

They are afraid of a severe liquidity crunch. Everyone running to
exits at the same time.

Some good reads.

https://www.bostonfed.org/-/media/Docum ... pa1804.pdf

https://www.advisorperspectives.com/art ... y-risk.pdf

gmaynardkrebs
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Joined: Sun Feb 10, 2008 11:48 am

Re: Are We Headed For A Passive Index Meltdown?

Post by gmaynardkrebs » Sat Sep 22, 2018 9:43 pm

Sailorgirl wrote:
Sat Sep 22, 2018 6:41 pm
This is my first time posting. I have been following boggleheads for about a year now and have learned so much from posters on this forum. My DH is retiring in 10 months. We are trying hard to get it right. We all know a downturn is coming. None of us know when. Our portfolio is large and tied up in our 401k. We are trying to be prudent. Fear is a very real irrational emotion. I know I have had it in the past. Trying not to be tied to it in the future. That’s why we have been working thanks to many here on “Our Plan”.

Passive investing (MF and ETF’s) has grown from 3% AUM in 1995, 14% in 2005 To 37% of all AUM as of December 2017. Passive funds now hold 14% of the total equity market. Most passive investors are small investors, Some investors are properly allocated for risk. Most are not. Very few people understand that you can not time the market and most people are terrified of loosing what little they have managed to save. (80% of retirement investors have less than I years income in retirement savings.) There are 90 million people over 55 and half of these people have no retirement savings or savings what so ever. 1% of the population owns 85% of the nations wealth. What happens when they decide it’s time to take their profits. Fear is an emotion that is hard to control. Logic has no part in it that is why it’s so important to have a plan.

The FED and others are fearfull of a big selloff (profit taking) in technology and other high profile stocks, which will kick in algorithms which will add to the sell off, which will result in the small investor selling on fear. The market is overbought everyone knows it.

They are afraid of a severe liquidity crunch. Everyone running to
exits at the same time.

Some good reads.

https://www.bostonfed.org/-/media/Docum ... pa1804.pdf

https://www.advisorperspectives.com/art ... y-risk.pdf
Congrats on your first post! My thoughts:

Don't believe everything you read.
Take deep breath.
Diversify
It's going to be OK

limeyx
Posts: 244
Joined: Wed Sep 07, 2016 5:34 pm

Re: Are We Headed For A Passive Index Meltdown?

Post by limeyx » Sun Sep 23, 2018 11:03 pm

EyeYield wrote:
Thu Sep 20, 2018 8:44 am
If everybody got in their cars and drove at the same time, we would be headed for a transportation meltdown.
Yup, and the next day 1/2 would stay home (or take the bus, or walk) and so it balances out --- we hope :)

bkweathe
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Re: Are We Headed For A Passive Index Meltdown?

Post by bkweathe » Mon Sep 24, 2018 9:34 am

Sailorgirl,

Welcome to the forum. I hope that post was only your 1st of many.

You may have learned a lot from the posters on this forum, but you seem to have missed the forest for the trees. In other words, you don't seem to understand the basic philosophy that we follow. Please read this & watch the videos:
https://www.bogleheads.org/wiki/Boglehe ... philosophy

If a big drop in the stock market is obviously going to happen in the very near future, why are so many people buying? Are they stupid? They either have money of their own to invest or have been entrusted with money to invest by others, so apparently they're not complete idiots.

There is a big drop in the stock market coming. We just don't know when, how far the market will drop, how quickly the market will recover, or what the market will do between now and then. Market timing does not work; Bogleheads know not to try. Determine an asset allocation that you're comfortable with & stick to it.

Brad

jalbert
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Joined: Fri Apr 10, 2015 12:29 am

Re: Are We Headed For A Passive Index Meltdown?

Post by jalbert » Mon Sep 24, 2018 8:52 pm

arcticpineapplecorp. wrote:
Fri Sep 21, 2018 7:30 pm
jalbert wrote:
Fri Sep 21, 2018 12:16 am
What a ridiculous article, filled with misinformation. The dot-com meltdown was triggered by institutions rebalancing? Pulease. The crash in 2000 was triggered by the end of Y2K spending, a major driver of tech spending during the tech bubble.
Sometimes we don't really know what actually causes the market to crash, because, really you'd have to ask every single investor why s/he sold his/her investments in the first place.

Nevertheless, my 2 cents is that many of the dot-com start ups had absolutely no earnings, no profits, no business plan. Any P/E where the "E" is $0 means you're paying an infinite price since any price divided by $0 is infinity.

Companies with no earnings can only continue to run provided they continue to get funding (i.e., loans from banks and/or capital from stock sold). Once funding runs out (along with confidence) companies can no longer continue to function. I believe this was what happened. Companies that were promising the moon, ran out of runway and everyone realized the companies' fundamentals no longer justified the price of the stock.
You are discussing the possible cause. The article and I were discussing the trigger, a subtle distinction.
Risk is not a guarantor of return.

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peterinjapan
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Re: Are We Headed For A Passive Index Meltdown?

Post by peterinjapan » Mon Sep 24, 2018 11:17 pm

One thing I read once was, when markets go south, passive holders sell just like everyone else. I don't remember the article. Obviously the statement wouldn't cover many reading this here, but is there any data to tell us whether holders of SPY would generally start to sell if it tanked by 20%, and if so, what %?

gmaynardkrebs
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Joined: Sun Feb 10, 2008 11:48 am

Re: Are We Headed For A Passive Index Meltdown?

Post by gmaynardkrebs » Tue Sep 25, 2018 6:49 am

peterinjapan wrote:
Mon Sep 24, 2018 11:17 pm
One thing I read once was, when markets go south, passive holders sell just like everyone else. I don't remember the article. Obviously the statement wouldn't cover many reading this here, but is there any data to tell us whether holders of SPY would generally start to sell if it tanked by 20%, and if so, what %?
Actually, they would buy equities and sell bonds in order to maintain their chosen stock.bond ratio, say 60/40 or 70/30.

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David Jay
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Re: Are We Headed For A Passive Index Meltdown?

Post by David Jay » Tue Sep 25, 2018 10:08 am

Sailorgirl wrote:
Sat Sep 22, 2018 6:41 pm
This is my first time posting. I have been following boggleheads for about a year now and have learned so much from posters on this forum. My DH is retiring in 10 months. We are trying hard to get it right. We all know a downturn is coming. None of us know when. Our portfolio is large and tied up in our 401k. We are trying to be prudent. Fear is a very real irrational emotion. I know I have had it in the past. Trying not to be tied to it in the future. That’s why we have been working thanks to many here on “Our Plan”.

Passive investing (MF and ETF’s) has grown from 3% AUM in 1995, 14% in 2005 To 37% of all AUM as of December 2017. Passive funds now hold 14% of the total equity market. Most passive investors are small investors, Some investors are properly allocated for risk. Most are not. Very few people understand that you can not time the market and most people are terrified of loosing what little they have managed to save. (80% of retirement investors have less than I years income in retirement savings.) There are 90 million people over 55 and half of these people have no retirement savings or savings what so ever. 1% of the population owns 85% of the nations wealth. What happens when they decide it’s time to take their profits. Fear is an emotion that is hard to control. Logic has no part in it that is why it’s so important to have a plan.

The FED and others are fearfull of a big selloff (profit taking) in technology and other high profile stocks, which will kick in algorithms which will add to the sell off, which will result in the small investor selling on fear. The market is overbought everyone knows it.

They are afraid of a severe liquidity crunch. Everyone running to
exits at the same time.

Some good reads.

https://www.bostonfed.org/-/media/Docum ... pa1804.pdf

https://www.advisorperspectives.com/art ... y-risk.pdf
When the market drops, remember these 3 little words: "STOCKS ON SALE!"

It can rearrange your entire perspective. You re-balance INTO stocks when the market drops.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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