But when everyone invests in everything equally, we all end up investing in nothing!

The previous post on the same blog debunks this. http://www.philosophicaleconomics.com/2016/05/passive/

http://www.ironbridgellc.net/PDF/hidden_risks_of_passive_inv... is an interesting countervailing read

What you're missing is that the stock market isn't a zero sum game. More money comes out of it than goes into it, because it represents companies that generally do useful things.

Except the biggest index by far is only 500 of the companies, not even remotely "the entire market".

You are thinking about this wrong. The S&P 500 is a capitalization weighted index meaning the larger the market cap the larger the weight. If you constructed a total market index using the same capitalization based weighting scheme, you'd find the S&P 500 would account for about 80% of the index value. In that light it is actually pretty close to "the entire market."

Vanguard total stock market fund (VTSMX) has over 3000 stocks, right?

Oh, there are definitely indexes/funds with broader coverage but the S&P500 funds continue to get a disproportionate share.

Are you sure about that? I mean, have you actually verified that with any particular fund family? I did, for the Vanguard family.

Vanguard S&P 500 index fund has $227.5B net assets (across all share classes)[1]. Vanguard Extended Market Index fund (which is the set difference of Vanguard Total Stock Market Index Fund and the S&P 500 fund) has $42.8B net assets (across all share classes)[2].

That is 18.8% of funds in Extended Market. The true ratio is 19% of funds in Extended Market[3]. Not so different.

Now you can argue that funds like the SPYder are the ones which receive a disproportionate share of attention. I would counter that (1) SPY is a smaller fund than Vanguard's (2) How much of that is investors vs. traders who use it for the liquidity.

In conclusion, I'm unconvinced that S&P500 index funds receive a disproportionate share of attention in investment, apart from investment professionals discussions. Even Buffet doesn't appear to care, and may simply use the S&P 500 because it is more well-known:

> Okay, so gold is not a screaming buy to Buffett. What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?

> "Equities," Buffett answers without a moment's hesitation.

> "The VTI?" I ask.

> "That's good enough. Maybe a selection of high-dividend-paying stocks that are likely to raise their dividends. Maybe the top 100 dividend payers of the S&P 500."

>Then, after a second's thought, he adds, "Well, maybe not that, but equities."[4]

[1]: https://personal.vanguard.com/us/funds/snapshot?FundId=0040&...

[2]: https://personal.vanguard.com/us/funds/snapshot?FundId=0098&...

[3]: https://www.bogleheads.org/wiki/Approximating_total_stock_ma...

[4]: http://archive.fortune.com/2010/10/18/pf/investing/buffett_b...