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by avvt4avaw 2485 days ago
You only need the marginal investor to be informed, so it's not clear that you couldn't have a much higher percentage of passive investment (say 90%) and only a small amount of active investors who are providing price discovery.

The bigger problem is that most passive investments are not really passive - for example, choosing to invest in a "passive" S&P 500 ETF over a "passive" Russell 2000 ETF is an "active" investment choice (preferring large cap over small cap) so valuation errors and bubbles could develop in segments of the market, even if constituents with an index are all fairly valued relative to one another. These valuation errors could sustain for a long period of time, because it takes much more money to correct a valuation error in a huge market segment than it takes to correct a valuation error in an individual stock.
2 comments
davidw 2485 days ago
This lists 3575 stocks among its holdings, which includes both large and small cap stocks:

https://investor.vanguard.com/mutual-funds/profile/overview/...

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avvt4avaw 2485 days ago
Sure, which is why I said that _most_ passive investments are not really passive. Vanguard Total Stock Market is pretty passive, as long as you consider your investment universe to be "US stocks".

But even in this case the fund only holds stocks (no bonds or real estate) and only US stocks at that (no international or emerging market exposure).

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groundlogic 2485 days ago
Mind explaining the concept of the marginal investor in this context?
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