[TheCoelacanth]

It should be self-regulating, though. The higher the portion of the market that is passively investing, the easier it should be to beat their returns by actively investing so the more incentive there will be to actively invest.

[whatok]

Once indexing gets to be a certain size, you run into the "markets irrational longer than you can stay solvent" issue at a much higher level. Active management "correction" doesn't really work if active managers are a much smaller portion of the market or no longer around at all.

[TheCoelacanth]

You're only taking into account making money via stock trading. There is always the option of buying a company to actually run it for a profit which is not reliant on the market's belief in the company's value.

[whatshisface]

Holding doesn't change the price: buying moves it up and selling moves it down. An index fund holding 50% of all shares on the market but not trading them would have no influence at all on prices.

[derivagral]

Does this exist, though? If you presume some % of America is putting their paycheck into indexes via Vanguard, Betterment, and some other % is selling due to being retired or whatnot, then this isn't an equilibrium.

There's maybe some room for redeeming index value and "caching" that demand from within Vanguard, etc, but I tend to doubt this action wouldn't hit the market at all.

[FabHK]

It can lead to pricing inefficiencies with shares inside vs outside the index. And those should be kept in check by non-indexing value investors.

[whatok]

Did you mean to reply to my post? I don't see the relevance.

[whatshisface]

An index passively holding 99% of the market would not interfere with price discovery because the remaining 1% would go about its business as if nothing was different. Indexes can't sustain irrational prices because they have no impact on prices.

[whatok]

A single entity holding 99% of anything will absolutely have an impact on liquidity which absolutely impacts price discovery.

[usefulcat]

> An index passively holding 99% of the market would not interfere with price discovery because the remaining 1% would go about its business as if nothing was different.

That may be true at the point in time where it's already at 99%, but consider the impact on prices as funds were poured into it over time on the way to 99%..

[whatshisface]

If the funds put in to the index were taken out of mutual funds, there might not be any impact on the prices at all.

[toomuchtodo]

There’s an equilibrium to be reached, for sure. The market just hasn’t discovered what it is yet.

[abakker]

I am not an economist either, but it seems that there is a danger in assuming there will be an equilibrium. I think it is entirely possible that there won't be one.

If there is an equilibrium, it may take a significant price shock to discover where it is. I.e. that equilibrium could be years behind us, and if there is a crash we might never recover the value that our current market assumes is there.