Consider the extreme example: Let's say 99.999999% of assets are in index funds and now there are basically only 10 people left in market who are doing active investing. So when these 10 people decides to sell stock of some company, that stock will fall by some minor amount but immediately all index funds would need to react to this minor drop and sell their holdings. But that would cause more market drop and price would take a death spiral route. This basically means that those 10 people now left to do active investment can now control the market. Any of their small movements gets amplified by large gorillas of index funds.

Above is just tip of the iceburg. The secret of the success of index funds has been very simple: They aggregate all the active investors and these average turns out to be better than individual. However when number of active investors reduces, the variance would increase and this means index funds would become less and less optimal over time.

That's not how it would work.

1) When one of the 10 sells they must be selling to another of the 10 who is buying. There's no such thing as just selling. Instead the way that the price would drop would be that the 10 start trading that stock between themselves at a lower price than it had been before.

2) If the price dropped then that wouldn't mean that the index fund had to sell. The index fund aims to own a fixed proportion of each company. If they own $98 million of a $100 million company and then the share price drops in half then they now own $49 million of a $50 million company. There's no need for them to do anything.

2) Index fund must balance their portfolio. If stock A goes down and B goes up then they must sell off A and buy more of B to re-balance. At least that has been my understanding.

Above two in combination means that you can cause chain reaction which is to be expected because much larger dollars is simply trying to imitate much smaller dollars. So later gets to control the former.

They must balance to the underlying index, not so that they hold the same value of each stock. If A goes down and B goes up they don't have to do anything unless the change is so dramatic that it causes the people who compile the index to update which stocks are in the index.

What can happen is that a stock being added/removed from a major index can cause a large amount of buying/selling by index funds as they are 'forced' to add or remove that stock in their portfolio. However that is a fairly rare occurrence.

Index funds own shares in proportion to the market cap. So an index fund will own shares of B worth three times as much as their shares in A. Lets say we're looking at a fund that owns $6 million of B and $2 million of A.

Now suppose A's share price doubles to $200 and B's share price falls to $125. Then the value of the index funds shares will now be $2 million × ($200/$100) = $4 million of A, and $6 million × ($125/$150) = $5 million of B. Meanwhile A's market cap has changed to 1000000 × $200 = $200 million, and B's market cap has changed to 2000000 × $125 = $250 million.

Then B's market cap is 1.25 of A's market cap, so the index fund wants to be holding shares in B worth 1.25 the value of its shares in A. It currently has $4 million of A, so it wants to be holding 1.25 × $4 million = $5 million of B, which in fact is the amount that it is already holding.

As active investors are basing their decisions on p/e ratios and EBITDA then algorithmic choices can substitute for the lack of human traders.

In fact, traders are the ones who should be worried about AI, not taxi drivers. We're going to need a lot less traders and more data scientists.

As the proportion of active investors in the market falls, those that remain enjoy a greater advantage. There will therefore always be some minimum threshold of actively managed assets (due to the marginal returns from active management eventually exceeding the marginal fees).

It's an open question as to what this threshold might be, but it will certainly be orders of magnitude above what you describe.

There are index funds that track the S&P 500. But who would decide what a "dumb" stock is? I don't even know where to start with this concept. I would not worry about this if you are an investing noob.

You should not avoid an American-only index fund. The U.S. equity market is by far the largest in the world, so a broad index of American stocks will cover a lot of diversity. That said, there are plenty of international stock funds available as well.

I would at least look at CDs (certificates of deposit) or short term bonds, which will give you better returns than sitting in a bank account. Stocks will have a better chance for an even better return... but also a chance that the market will be down when you want to get that apartment. That's a fundamental concept for investing: higher returns come with higher risk (and vice versa).

2. Any level of active management would make an index fund not an index fund. You'd be going to trying to pick the best-performing stocks, which is not what an index fund tries to do (capture the overall movements of the market).

3. The general advice is to have approximately a 65/25/10 split between SP500/international/extended market funds. You can adjust as desired.

4. Stock index funds are great for long-term investments, not so much for shorter ones. You can look at bond funds as well. If you have a good amount already (>100k maybe) you can schedule a free discussion with an advisor at places like Fidelity/Vanguard/CS and have them run you through the basics.

2. What is a dumb stock?

3. I don't have the answer to this but keep in mind that those with a vested interest in the success of local markets (e.g. financial advisors within a given nation) are likely to suggest that people invest more in those areas.

Your inclination to consider likely geopolitical shifts as you make these decisions is a good one.

Nobody can predict the future and you shouldn't get your investment advice from Hacker News, but putting everything into one investment tends to be a bad idea.

Certainly not at half. It is an open question how high it can go before there are destabilizing effects, but it's very likely way above the 90% level.