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.