[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.