Main difference is that the past 10 years everyone and their mom parroted the mantra "buy index funds, it is the best place to put all your savings". That wasn't the case before, today index funds makes up a larger share of investors than ever before in history so we have never seen what an economic crash looks like when everyone invests in index funds. Maybe it wont be bad, but maybe this will be the biggest crash ever, it is unknown territory.

"How could index funds crash, they correlate with the entire market!"

Well, then they crash by crashing the entire market. And once the market starts crashing and people gets worried about their investments and wants to cash out their index funds, it will continue to crash.

Why would index fund investors be any more likely to cash out on falling equity values than investors in actively managed funds or single equities?

If anything it seems quite the opposite? Index fund investors know the market always goes back up on long enough time frame. Investors in actively managed funds have to continuously question whether their manager is incompetent.

Index funds invests in the whole economy, so when they are overhyped people will over invest in the whole economy, that is the main danger. But yes, the invest/cash out cycle is probably longer than other kinds of investments, so wee see a longer bull run than normal but likely we will also see a longer/deeper recession than normal for the same reason.

Not every index fund invests in the whole economy. Lots of ETFs and mutual funds out there targeting specific indexes that represent only parts of the market. Even relatively broad ones like the NASDAQ, or specific ones for ultra short treasuries.

Index funds just automated prior portfolio advice. Are you suggesting that the previous portfolio advice was bad, the efficiency of the automation will cause more correlated crashing or something else?

Crashes typically happens because some part of the market was overhyped and people invested too much money in it. But what happens when the market as a whole is hyped, and people invest lots of money in that? Well, then the market as a whole becomes overvalued, and the market as a whole will crash in the next recession. You can see this being the case with the buffet indicator, stock valuations are higher relative to gdp than ever before. So instead of people pumping up some specific segment of the market that then crashes, this time people pumped up the entire market.

Given that index funds track the most popular funds is it actually the case that money is distributed differently than before? As an index fund investor I have no illusions that the index funds are immune to dips, but I know that I'm saved from the extremes that individual stocks provide - the odds are excellent I'll never wake up ruined overnight, but by also I'll never get spontaneously rich either.

Just for context, while they have grown index funds only make up 10% of the market according to vanguard[1].

[1] https://www.vanguard.ca/documents/truth-about-indexing-en.pd...

The passive vs active investor numbers I see tend to put them roughly equal or passive investors being more. Not sure exactly how index funds and passive investments are different, but since vanguard are selling index funds they probably define it as strictly as possible to make it look like it is a smaller part of the market.

That may be the case, doing a bit of research here I see some numbers where if you slice only the America market passive investors are near parity of even a minor majority - but the question still remains, has that fundamentally changed the market composition?

I wonder if it'll make it more stable because the passive investors aren't as inclined to randomly shift money around or pull it out. Even if they are inclined to pull it out, does the behaviour of the money being pulled out look much different when looking at the market in aggregate? It stands to reason even active investors would be heavily invested in those exact same companies and would be deliberately pulling money out as well? It seems to me that all the investors investing in the average just means the market will continue to be average.

If all investment activity was passive investment, there would be no pricing mechanism left in the market. If everyone just equally invested in everything, there'd be no discrepancy between stocks. Complete scam businesses would given value equally to businesses which actually do create value.

So, yes, passive investing helps stabilize the entire market to trade in tandem, but too much is a danger to the health & stability of our market and economy as it enables misallocation of capital.

But that's not how the passive investing works - it's predicated off of curated indexes, so people are still making decisions. And there's not equal weighting in everything. What you're worried about isn't the current situation and it makes no sense that it ever would be.

Unless weighting is done by business fundamentals, it still enables misallocation of capital. Many curated indexes and decisions are based on market cap, liquidity, public float, sector classification - all hardly fundamental.

> Unless weighting is done by business fundamentals, it still enables misallocation of capital.

Is it your assertion that without index funds this would be occurring? We just saw deliberate decisions to buy companies like TSLA and GME that stronly argue against that.

Surely you believe there is some P/E where a company is a bad investment?

Depends on discount rates. The value of a company is the net present value (NPV) of its discounted cash flow (DCF). P/E is just a kludge to simplify the much more complex DCF analysis.

And it's pretty clear that interest rates have been steadily falling for 40 years[1]. Arguably 500 years[2]. Is there temporary variation around the business cycle? Sure. But in the long-term it's extremely unlikely we return to the There's strong macro evidence that interest rates are heavily influenced by demographics[3]. And despite what happens this recession, the population isn't going to stop aging.

All of this to say that historical appeals to "normal" P/E ratios is extremely misguiding. We're probably never going back to a world where single digit P/E ratios are the long-term norm, because we're probably never going back to a world with 5% real interest rates are the norm.

[1]https://fred.stlouisfed.org/series/REAINTRATREARAT10Y [2]https://www.visualcapitalist.com/700-year-decline-of-interes... [3]https://www.frbsf.org/wp-content/uploads/sites/4/4-Thwaites-...

In the big picture interest rates have been falling since 800 years (p. 13 [1]).

[1] - https://www.bankofengland.co.uk/-/media/boe/files/working-pa...

Not in isolation no. How would that make sense?

You are correct, but that doesn't mean this will hold true forever.

The index fund approach doesn't suggest that index funds will always do really well, it suggest that it will always do better over a long period of time than individually-selected stock. Any conditions that cause index funds to do poorly seems to also cause most individual stocks to do poorly. Index funds are a risk-mitigation strategy.

Of course it is possible after the fact to find collections of individual stocks that have outperformed the index fund. Trillions of dollars have been staked on trying to do so ahead of time, with little to no success.

Is it possible in the future that groups of funds will somehow perform worse than the individual stocks making up those groups? It's very hard to see how that could happen over any extended period of time.

Given no reliable alternatives, I don't see an option other than to bet my long term goals on long running trends.

You cherry picked the companies though. Take the index for the top companies in some other country than USA and that investment no longer looks as secure. USA did great the past 100 years, many other countries didn't.

Buy VT instead. If thirty years from now the value of every meaningful company on Earth is inflation adjusted worth less than it is now, bullets and farm land would have been the only viable investment.

Usually those indexes are not as diversified as the US index is. Take German DAX for example. It's mostly made up by chemical, car and industrial companies. The post-war German economy did really great as well, but many leading German companies are private. Furthermore, the USA is one of the biggest economies in the world, way bigger than most single countries on their own.

OK, so I didn't make the original S&P market argument, I think they should go bigger and focus on globally diversified broad market funds, but, to get back to my original point, what's the alternative here?

There isn't one. People love to spread doom and gloom without any real solutions. Real estate, gold, crypto, bonds, etc... are all either affected or soon to be affected by these economic conditions. Panic sellers will lose big and folks that don't have the means to weather the storm will suffer. Personally, I still believe in a well diversified portfolio being the best option (as do many), but the truth is, nobody really knows.

this fairytale may help you sleep at night. But 100 years is almost no history at all, i hope you can appreciate that.

I don't know if expanding our understanding beyond that is useful. If we looked at historical trends we'd all be looking at ways to hoard tea and salt.

I love that this comment lines up with your username. Yarrrr!!!

True only for US stocks—possibly cherry-picking.