Re:The Impact of Index Investing: A Follow-Up
by jcdavis on Wednesday May 04, 2016 @01:06PM
(#11629760)
> Isn't there a danger that if not enough people actively manage their money, the market won't 'correctly' set prices?
If this stuff interests you, I recommend reading the previous post (http://www.philosophicaleconomics.com/2016/05/passive/), which discusses this exact topic.
Re:The Impact of Index Investing: A Follow-Up
by pbreit on Wednesday May 04, 2016 @02:25PM
(#11630481)
I think you're right that there would be a natural balancing. If too many passive dollars went into certain companies, they should become more clearly over-valued than a peer not in the index.
Re:The Impact of Index Investing: A Follow-Up
by drumdance on Wednesday May 04, 2016 @11:01PM
(#11633733)
When people withdraw money from an index fund -- say, to put a downpayment on a house or move it into a fixed income fund for retirement -- they are effectively placing a sell order on every stock in the index.
And if they put money in from their monthly paycheck, they're placing a buy order.
As long there is a reasonably good balance of buyers and sellers of mutual funds, the underlying securities will find equilibrium.
Re:The Impact of Index Investing: A Follow-Up
by dragonwriter on Wednesday May 04, 2016 @01:30PM
(#11629975)
> Isn't there a danger that if not enough people actively manage their money, the market won't 'correctly' set prices?
There is no "correct" price aside from the price set through the market.
If you own all of the stock in the US, and no-one actively trades in any single stock, how do you know how much one sort of stock is worth against another piece of stock?
I think this eventually drives trading of individual stocks, as the market looks to set prices/trade things this that it thinks are over/under valued.
So I think that it's true that on average an active investor will make less money than a passive one, it's the active one's doing the work/generating the value, as well as giving money to the passive investors!
(presuming rational actors, laws are obeyed etc etc)