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by busterarm 2841 days ago
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.
3 comments
asdfasgasdgasdg 2841 days ago
> 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."

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PeterisP 2841 days ago
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.

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lsc 2841 days ago
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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