I don't understand the fear. If index funds dominate the market to the point of a near risk-free rate because that's what everyone's doing, you've effectively democratized the capital system to the benefit of the regular joe: companies still turn profits, and those become dividends. Dividends are why we buy stocks. That's what drives the whole system - not a zero-sum bilking of active investors. Yes, major growth spurts will probably be concentrated into a fewer select group of niche sectors and active traders, but that'll be their voluntary risk profile.

EDIT - I highly recommend watching some of Robert Schiller's Financial Markets lectures on Yale Coursera about general investment theory. Bogle is saying good things, but he simplifies it in a way that I can see might sound disconcertingly incomplete. You're not wrong to ask these questions if you're conscientious and smart enough to want more in-depth answers.

But then, say you come a long with a new company going public... you're not large enough to be in the S&P 500, so if everyone only invests in S&P 500 index funds, no one will buy your stock. Similarly, if you're Apple (the largest company), and you have a really bad quarter, say you lose $100B, no one would sell your shares, because they're passive investors.

Obviously, these are edge cases (we'll never be 100% passive), but there is some concern that there will be a lock-in effect for companies currently in the S&P... It will be harder to grow if you're not in it, and it'll be harder to fail if you are.

It's a perfectly valid question. In my very cautious humble opinion, I think what it means is that the style/size matrix[0] will get squeezed more into a single spectrum: large companies will be pressured into stabilizing and delivering dividends and small ones will compete to grow large enough to get a piece of the passive investment gravy train. Apple can have a bad quarter, but it's just one company. It can't keep having a bad quarter. And if they start to and have to downsize to stay alive, they would by doing that hasten themselves out of a market cap that would qualify them for the index.

There's also no reason why passive indices have to reflect the total market weighted for market cap.

[0]https://corporate.morningstar.com/US/documents/MethodologyDo...

As per the article, Vanguard's biggest fund is the Vanguard Total Stock Market Index which tries to track the CRSP U.S. Total Market Index. That index is "Nearly 4,000 constituents across mega, large, small and micro capitalizations, representing nearly 100% of the U.S. investable equity market." I don't think you have to worry much about a bifurcation between large and small companies. My worry would be that the "investable equity market" is shrinking and that most the growth in the future will come from companies pre-IPO where non-accredited investors cannot invest.

The number of total publicly traded companies isn't projected to get anywhere close to historical levels in the near future. There are steps being considered to change the current definition of accredited investors and/or to permit non-accredited investors to participate in private investments. See helpful reading/viewing:

- http://www.investmentnews.com/article/20170224/FREE/17022994... - https://equityzen.com/blog/alternatives-part-of-investment-p... - http://video.cnbc.com/gallery/?video=3000598150

Disclaimer: Links #2-3 are affiliated with my own company, so you should decided whether or not to believe me.

"My concern is that if everyone is in the passive investing boat then we're no longer following the market, we're making the market, and it's a big departure from the philosophical under-pinnings behind the idea of passive investing."

I'm intrigued by your suspicion ... but I can't put my finger on the exact manner that this might play out ... it's really hazy.

It seems to me that the effect of everyones money going into index funds would be that firms large enough to be in the index would have less and less pressure to issue dividends ... if there is a ready market of buyers of your stock based solely on your size then why bother ?

If money flows, by autopilot, into an asset class wouldn't we expect that asset class to return less and less as time goes on ?

Size-based index funds are just one type, there are others, including ones that track stock of high dividend yielding companies. Just because passive investors aren't trading daily doesn't mean they won't adjust to better funds, forcing companies to pay out.

I think the long long term problem is that the stock market has an increasing disconnect between investment in new businesses doing anything well new, and to an increasing degree novel business practices in existing businesses.

Yes, there are some IPOs, but overall new business starts are still in decline, and large portions of financial markets seem both too systematically risk averse, and yet willing to follow other risks blindly.

what's a good hedge against this?