What Happens If Everyone Buys Index Funds?

[@premiumbr]

Everybody should go for stock picking , so I can make money with my index fund 🙂

[@TobyNewbatt]

😉

[@csortitoutseul]

Lol

[@csortitoutseul]

Lol

[@anthonyjanes9973]

That will never happen, there are lots of people out there who think they can outperform the market, I was one of them once upon a time, I realised the error of my ways.

[@dodiloi]

I overperformed with the Nasdaq etf 😂😂😂

[@jakkuwolfinsomnia8058]

What if everyone tries to do both

[@dysaster4521]

while you can its quite difficult, If you really look into a company you can actually make good money, just don't buy pink sheet stocks

[@anthonyjanes9973]

@@jakkuwolfinsomnia8058 they never do

[@andresgarciacastro1783]

@@dysaster4521 Too much work, I much rather use my time to enjoy my hobbies.

[@user-do6jp1zg5r]

There are lots of index fund holders that are selling, ones who are rebalancing, ones that de-risking because of retirement, ones that want to diversify, and those that just want to sell to live on the proceeds ... So lots of sellers and buyers. I don't think there is going to be any issues with just sticking to index funds. Just my opinion...

[@johnsdiychannel8436]

Agreed, it is quite likely the one who has the S&P 500 also has euro and asia etc indexes. A rebalance between these funds will cause a buys/sells to happen. Agreed, retirees are selling, they cant be holding on to the funds forever, they have to spend the money to live. Agreed, I'm not worried in the least, well may be I will diversify a bit more 👍👍

[@DarkoFitCoach]

Correct. Retirees have to sell monthly, nee customers, ongoing customers, selling all and buying new etc etc. Plenty of vplume on any vanguard etf

[@ChrisShawUK]

Yep .. I was a net buyer of index funds until 2019 when I stopped work at age 51. Now I'm a net seller and will be unwinding my position slowly over the next 45 years or so (if I live that long. If I don't, someone else will be selling them all the day after I can't)

[@eric2394]

S&P is already diverse. Lot of the companies are in Asia and Europe

[@kyleolson9636]

When a retiree sells shares in an index fund, individual stocks are not necessarily sold. That only happens if more money flows out of the index fund than into the fund. So as long as more money is moving into index funds and away from active funds, retirees invested in index funds will not be a source of sellers in the market.

[@nickmichie7480]

I'm 100% index funds. Can't be bothered with picking stocks. Happy to just set and forget :)

[@ChrisShawUK]

Me too.

[@livingart2576]

I have most of my portfolio in index funds but also have 20% Tesla. 20% may seem a little high for an individual stock but I’m happy with my choice.

[@ChrisShawUK]

@@livingart2576 all depends on portfolio size I guess. If your total assets are £10k then it doesn't really matter if 20% are in one stock. You can rebalance with new contributions going forward. If you have a portfolio of 250k, it starts to become material. You'd then have to be clear that the Tesla stock is going to perform at least at as well as the index over the next couple of decades.

[@andresgarciacastro1783]

100% this...

[@LilySaintSin]

Same

[@thelammas8283]

At the extreme, if the majority of people will be buying funds without evaluating them. That would open up huge valuation mistakes, which would make it possible for active managers to make a decent living again.

[@TobyNewbatt]

Exactly this :)

[@Georgggg]

No, thats huge mistake. If something is overvalued, you can't profit off it. Only if something is undervalued - you can buy it. Market definitely can exist in a state of overvaluation when everyone see it. Because markets can be irrational longer than most bears can stay solvent.

[@Georgggg]

In a state when index funds get more inflows than outflows, it can exists as self-fulfilling ponzi, and sure beat others because others don't get free dumb money as exit liquidity. But imagine if some day for some external reason funds will have only negative net inflows. Then suddenly even your grandma will beat index funds, because they'll start to have negative edge to the market: they'd have to sell more and more stocks, and because of that, it'll be ultimate losing stocks by the time.

[@Kimba33]

Really? What indicator can experts use to buy stocks that are undervalued in their opinion on that scenario? Think about it, a stock only rises if people buy it, and if the experts buy "undervalued" champions that nobody realises to buy then they're just buying dead stocks. Dumb money, i.e. blindly buying the index, inevitably leads to stock concentration. Only an event opening the eyes to these blind buyers can make them change their option, and that event is called a crash. However undervalued stocks dump even in a crash. Hence these expert purchases are meaningless.

[@miguiprytoluk]

​@@Georgggg"If something is overvalued, you can't profit off it." Hmmm, I guess you never heard about Put options?

[@fakealias]

We also forget the one of the major buyers/sellers are the companies themselves with buybacks, stock comp, and dilution that can actively keep companies fairly valued.

[@clint3868]

Companies want to increase their stock price at the end of the day. They contribute to the stock overvaluation problem and don’t do anything to help solve it. Buybacks increase stock prices

[@Wishkeyn]

​@@clint3868Thus stock prices end up "overvalued" so people will sell them off with a profit, what kind of an argument is this?

[@kukuc96]

There was that saying: There are 3 ways to beat everyone else in the stock market: Be smarter, be faster or cheat. I am definitely not faster than a high frequency trading algo, certainly not smarter than everyone else, and I won't cheat, so indexes it is.

[@bigboldbicycle]

Institutional investors have the most influence over price movements, and they will never be buying index funds. Plus was you say in the video, everyone else will always dabble in picking stocks, so I agree there will always be active investors out there.

[@bukki07]

I have over $200k ready to be invested, however I am having trouble trying to find out what investments would be best during this present economy. Heard index funds and ETFs provide diversified stock market exposure while spreading risk. How true?

[@fromthebirchwood]

Very true, there are strategies that could be put in place for solid gains regardless of economy situation, but such execution is usually carried out by an investment specialist

[@J.woltz48]

The issue is most people have the “I will do it myself mentality” but not skilled enough. Ideally, advisors are perfect reps for investing jobs and at first-hand experience, my portfolio has yielded over 330% since covid-outbreak to date, summing up nearly $1m.

[@okaydamian]

@@J.woltz48 truly appreciate the implementation of ideas and strategies that result to unmeasurable progress, thus the search for a reputable advisor, mind sharing info of the professional guiding you please?

[@J.woltz48]

’Karen Lynne Chess’ is the licensed advisor I use. Just search the name online. You’d find necessary details to work with and set up an appointment.

[@The1SlayerChannel]

These bot comments are everywhere trying to scam people

[@robertobomfin3787]

Nice video. I would just complement it: my understanding is that as index funds grow comparatively to individual stock buyers, the market becomes more predictable because there are fewer one-to-one transactions. That means that the reward for the successful individual stock buyers will increase while the index fund return will decrease comparatively to one another. So, there is a sweet spot where both methods operate in some sort of equilibrium. For this reason, there will be always an incentive for active funds to exist.

[@TobyNewbatt]

Perfect summary :) And you would then expect the best active managers to show us how good they really are :P

[@philiplythgoe7173]

I have been trading ETF's as well as shares. Buy different funds within the same sector off different providers, each provider will have different XD days so you can chase the divs, you will always be invested in more or less the same comps all of the time ....

[@OopsFailedArt]

Love this. I primarily invest in index funds but do dabble in individual stocks when I spot a very good risk. This has served me quite well. I get the sustainability of the indexes, coupled with the occasional, high probability winner that pushes me forward

[@isaacakers]

I really appreciated this video. I don't watch all your videos, just cause time. But out off all the finance channels I follow, I really appreciate when I watch yours. You have such an honest humility that isn't common in this space. I hope the world doesn't take that from you someday when you have millions of subscribers. I think your book review videos were some of my favorite. I've bought and read at least 5 that you suggested, and as you stated, were worth far more value than the tiny price tag to purchase them. I'd love to see more book reviews and recommendations in the future. Keep being you. Sincerely, A fan

[@Simon-vo7gi]

I am invested in index and stocks. My Nvidia purchase a few years ago has more than made up for any wrong stock I picked.

[@MARKCRASTO]

Damn. Good pick 😮

[@carlyndolphin]

You got lucky. Longterm Nvidia is unlikely to beat the market

[@Simon-vo7gi]

@@carlyndolphin Oh it’s way overvalued at this point. I sold some off.

[@lVlegabyte]

I still regret needing to sell AMD when I bought a bunch at $2. But I sold everything for rent money later that year.

[@blahbleh5671]

@lVlegabyte womp womp

[@creatingbalancefinance]

Brilliant video Toby! Your editing is so good! I’ve got a lot to learn 😂 wishing you all the continued success with your channel 👍

[@TobyNewbatt]

Thank you!!! It gets easier the more you do as you know :)

[@timlodge8267]

If I was not into individual dividend stocks I would buy the S&P 500 either the VUAG or VUSA.

[@yesno9834]

@@pmason6076I prefer VUSA and have it set to auto-reinvest the dividends as it gives me the option to take it in the future if I wish.

[@1292liam]

or GPSA

[@DarkoFitCoach]

For how long of a period have you beaten the market already?

[@DarkoFitCoach]

​@@pmason6076is that such a problem to get dividend and just press 1 button to buy more with it?

[@ChrisShawUK]

Ah, the curse of being a dividend investor. How long would your dividend portfolio have to underperform the index for before you throw in the towel and just buy the index?

[@HichigoShirosaki1]

If passive funds were the only things in the market, there would still be buying and selling, just not individual stocks for people. That's really what etfs are. They are just a group of stocks. A group can be literally any combination of the overall market using any metric imaginable. For example, there can be a Letter A index that just has all the companies starting with the letter A that are all equally weighted. Because of that, though, passive funds effectively have to trade stocks themselves. So even if people aren't directly trading stocks, they actually are doing so. It would not matter if there were only passive funds even if people only ever bought and never sold, because in order to keep their weights and stay diversified, the funds would have to trade between themselves and it can be automated. Additionally, funds are bought and sold like any stock and there will always be people selling even when it's not market related reasons. In this way, passive funds act like a grouping but also a regular stock of any company. That's why funds in general don't matter. All they do is add an additional layer of ambiguity to how much is being invested in a company because all of it can be done behind the scenes.

[@Brodzik-kz8nt]

If everyone bought index funds, it would simply turn into social security or universal basic income.

[@malcolmstonebridge7933]

100% spot on with the comment about only seeing the successes instead of the failures.

[@williamnelson5995]

Another funny thing to think about: you have all these working people paying automatically into index funds. Then on the other end you have retirees withdrawing funds by selling...to who? To the working people who are investing. So what's really happening is simply working people paying money to retired people. Sound familiar? It is pretty much identical to social security, and especially when it's all automated by indexing and automatic contributions. Food for thought. Also notice that there's no law saying that the quantity of sound investment opportunities has to exactly match the amount of money people need to invest for retirement...but the system of automatic investment into index funds proceeds as if this is the case.

[@TobyNewbatt]

Interesting comment - however if just young working people are buying and retirees were selling on an equal level you would have no price change at all.....The prices have risen as more buying pressure has entered the market. On your second point I'm not sure what you are trying to make here. An index fund promises nothing, only the returns of the market which can be positive or negative. The market will always have risks...but the alternative is far far riskier both in doing nothing or picking individual securities. If yu go down the latter route you have significant;y more risk and are likely to underperform :)

[@ThomasVWorm]

​@@TobyNewbattthere is no "however". The price change does not mean anything. It is only an artifact of the distribution scheme. You do have the same with social security: the old get as much out as the young do put in. You do buy "shares" too, which is how the system counts your individual inputs when you were young. When you are old, the sum of all counts of all the old relative to your individual sum decides, how much you will get from the entire money the young give into the system. So it varies how much 1 in the calculation is worth in eg. Euros. The interesting part: it completely works without shares, since it is only bookkeeping. And it only redistributes income of the young to the old. The usage of stocks does only introduce mythical thinking. There are shares in circulation, which are about 100 years old. The investment, which was funded by selling those shares, is probably deconstructed since many decades. What is left from it is only a piece of paper.

[@markwilliams4312]

I left SJP after 12 years of investing with them. I put all my money into a Vanguard portfolio which somewhat mirrored the SJP investments and my profits soared. I have no doubt that it was the right decision.

[@TobyNewbatt]

It’s of fees saved! Insane how they add up!

[@Jskigod]

Yep they take 2.2% of your portfolio to manage it. Doesn’t sound much but you compound that over a long period and it’s very significant indeed. The products that the SJP adviser will ‘sell’ are on a whole pretty poor performance wise. I woke up to this after 4yrs being them.

[@DarkoFitCoach]

2.2% is CRAZY expensive. Vanguard sp500 is 0.07. Thats 30x the difference. Plus index beats managed funds most of the time anyway

[@carlyndolphin]

So far SJP is matching my Vanguard portfolio.

[@gonnahavemesomefun]

@@carlyndolphintell me you work for SJP without telling me you work for SJP 😂

[@GregCannon7]

In the case that everyone's passive, then wouldn't it be impossible to outplay as an active manager since there would be no one left to cause the swings in valuation? Companies could be mispriced based on the fundamentals, but if everyone's passive then it'll just keep tracking the index.

[@robertbalcezak1636]

It makes it easier for active managers as most of the market is blindly following each other, causing many tickers to be incorrectly valued

[@persieprince9345]

But lately there is a rise in active management etfs For example active value is beating the index value,recently avantis and dimensional are growing aum fast and their cost is close to the passive ones

[@TheUndulyNoted]

There are these things called hedge funds. Many of them deeply analyse stocks and determine if they are underpriced, in which case they buy. If the market ever became hugely inefficient, people would pile in to close the inefficiency and make a fortune doing so. That’s why there will never be an index fund bubble

[@rogergeyer9851]

In the REAL world a LOT of hedge funds BLOW UP and have to be shut down after losing a HUGE proportion of their capital. Acting like these are reliably super efficient and accurate traders is INSANITY. Buffett won a bet awhile back, betting a hedge fund couldn't outperform SPY over a decade. And that's just the broad market index of large stocks. Nothing special or pushing high growth like tech.

[@jackbrown5184]

@@rogergeyer9851 OP has a point, if there’s inefficiencies in pricing between asset classes the market will fill the gap. It’s essentially a risk free bet called arbitrage. It’s quite common in forex markets between multiple currency pairs or during merger/buyouts.

[@ClickBeetleTV]

My wife worked for a Manhattan hedge fund for a while. She got out of there as soon as she was working for a literal scam and didn't want to get caught up in it when it imploded

[@amgonof]

Also worth mentioning, market makers (citadel securities and others) are constantly buying and selling these index funds to make sure their market price approximates that of its net asset value (i.e. the market price of the underlying stocks). So while index funds will probably never be exactly 1:1 the value of its NAV, it will be very close to it

[@outtolunch88]

Big money doesn't buy index funds, those funds are for us little guys. Big money has insider information.

[@Skaahn]

I believe there is some substance in the Index Bubble story. I watched a podcast Rational Reminder, where Mike Green makes a good and scary case of Index Bubble.

[@tedarcher9120]

What index funds do is take shares out of circulation so what shares are left have huge impact on average price. It's basically the same as buybacks but for free

[@GeorgeHyland]

I am gradually unwinding all my individual stock positions and going to VTI. It will take five years or so as I want to dollar cost average out and some of them pay good dividends and my cost basis is low thanks to DRIP. But, when I got to my NVDA shares last year, I held them. I am glad I did….. but there will come a time to unwind that position as well. That is the tough part, knowing when to sell.

[@anastylos2812]

There are many different index funds. Investing in a clean energy index or a chips index will give you different companies than a world index. There will be indexes that beat the world index and this will diversify capital.

[@whykoks]

May be diversify into different index funds like large cap, mid cap, small cap etc. This way you cover the majority of the market.

[@ssssaa2]

Exactly. I would love for 99% of the market to be index funds, would make it easier and easier to pick out individual stocks that are clearly wildly misvalued.

[@TheStalec]

The major factor of why the trackers have performed so well is because of the insane concentration in a few US technology names. A lot of FM’s won’t hold such a large amount in single names. What’s my point, well it was easy to outperform the index by factoring this in. A lot of countries active managers smash their index.

[@danablack223]

Let's not forget that there are multiple "passive" index funds that get rebalanced according to fundamentals (i.e. Value, Quality stocks), so in practice there are ETFs that actually serves as counter-balance of the more traditional ETFs, such as SP500

[@DonLee1980]

Tech has always traded at a higher PE. The fact that they have grown so big, it makes sense that the overall PE avg is higher. To argue that index funds causes the overall PE to be higher, you’d need to show that non-tech funds in the S&P are also trading higher than usual, rather than the tech funds.

[@sahilpatwardhan2008]

Thank you for this video, I agree with your analysis. The market will correct since active managers will find opportunities if it becomes too hot from a passive perspective.

[@kofikumi-addo3908]

Excellent presentation. Very insightful. I believe there will always be active investors as you said. This is because there are some people out there who believe the can beat the market.

[@omonkkonen6676]

Passive index funds get money from every day Joe. What happens when there is global recession and Joe will be out of job and needs those funds? What is 20-30% passive index funds money will be taken out from market? How much stocks will go down?

[@taylolz]

When you buy a fund you don't own the stock, the brokerage does and it gets the board positions for it

[@eagerbeever22]

The reason the active fund managers can't beat the market is that their performance is being evaluated against their peers on a quarterly basis which is very short term. Therefore, they are incentivized to perform best in the short term and as a result the long term performance is sacrificed for the sake of short term benchmarks as they keep buying & selling to try to get the best results in the short term. That's where we retail investors have an advantage because we have a long term mind set. So we are not forced to sell any stock in the short term & can ride out the market fluctuations to get the best long term results.

[@rebeltheharem7028]

The market would eventually self correct so the ETF value will eventually go back to its NAV. And this is even more so with automated computer algorithms that already take minute advantages of stock arbitrage, making pennies on the dollar, thus making the market correction returning to its NAV, happen faster, usually within a few seconds from a surge in supply or demand. It might have been possible before the advent of stock trading algorithms (like pre 90's stock trading, where things were slow as heck). But now? Not so much.

[@kbdkbd99]

when will people realise that being overpriced and being in a bubble are not the same thing ? Bubbles typically involve a positive feedback loop that cause price to rise unsustainably. If something is overpriced - just say that. A more succinct way of putting this would be to say that the delta, or the change in passive investor volume over time, can affect the overall return of the fund. For example, you wouldn't want to be the investor who buys at the peak of index fund popularity and exits when others are moving into bonds, as this timing could negatively impact your returns. In reality - as things stand today - such an effect is probably tiny. We are talking low number basis points. A bigger concern of mine is the ability of a fund manager to move quickly in the event of a major financial event.

[@barnabusdoyle4930]

It’s not really the fact that everyone is invested in the same thing that people should wonder the downside of. It’s the fact that the dollar as the global reserve currency has resulted in the U.S. stock market holding 70% of the world’s investment money. The world is currently on the path of heavy dedollarization. What will happen to our investment markets.

[@mekosmowski]

I recently learned that you can trade options with ETFs. Kind of the best of both worlds.

[@valerienewbatt9678]

Very interesting, great video Toby.

[@TobyNewbatt]

Thanks 👍

[@rulebritannia4006]

Hi Toby, I love the content as always. What is your opinion on the invesco coinshares global blockchain ucits etf. I'm investing pretty aggressively as I believe it's the future. Appreciate any comment you have on it is not financial advice. 👍 from me

[@mervynman6303]

Excellent video Toby, liked and subscribed, will watch your other videos. I was thinking about this passive investing proliferation recently, but I do not have enough knowledge to predict consequences, so I liked your explanations. I know about investing habits of some people around me and almost all of them just buy low ER S&P or total US market ETFs or index funds these days because those are so promoted online. I know only one person who buys individual stocks. People buy much less international stock ETFs and bond funds as well today compared with 10-15 years ago. It does feel that it may create some bubble if people from around the globe just buy S&P 500 via ETFs and funds. And people are worried it will burst. But maybe it will not burst. There is some economy growth and high inflation, so the stock prices will continue to grow. I myself continue to buy US market ETFs as it worked in the past, but I did start to buy some treasuries as guaranteed 4+% for 10-20-30 years is pretty good. At least 10-15 years ago bond/treasury yields were terrible. Overall, people got much smarter with investing due to youtube, podcasts and other means of free education

[@PassivePortfolios]

As long as there are some active investors to determine the fair prices of stocks, indexing (passive investing) will continue to work just fine. The chances of active investing disappearing are ZERO. It is against human psychology to invest passively so active investing will be with us forever.

[@rafaelvalerofernande]

I wonder if could be possible to see the active investing companies size, because I do not think they are getting smaller. Are they?. Many fund have business model far beyond picking stocks in a portfolio, they could short the assess, select managers, affect the decisions, focus on venture capital, specialise in sector or countries and so on. Even in you select ETF does not means you use it well or diversity in the right way. The large passives etfs may ask customer to select and vote and similar options. Personally I like the idea of having a number of different products and strategies to compare across time. Stocks and debt are also a portion of assess you could use as well.

[@TheTrueM4gg0t]

Am I too stupid to understand what you're saying, or did you basically answer your question with "No worries, won't happen" ? 😅 That's not very scientific ^^ I guess you could argue that even if 100% of people were invested in index funds (assuming the indexes differ among eachother) that trading between them would eventually correct prices of individual stocks.... But that's a bit of a reach. But I do agree with your conclusion. Maybe a huge share of investement money going passive, might even "make it easier" for individual stock pickers to find discrepancies, as the market might lag the true value more in the future?

[@TobyNewbatt]

It’s doesn’t need to be scientific it’s just an objective fact that everything that is bought or sold needs to also have someone else on the opposite end 😎. Any price errors or opportunities will get eaten up by the market - because there is just so much at stake and so much money to be made. Incentives are a very powerful thing 😎👍

[@TheTrueM4gg0t]

I agree! 😊 It just doesn't answer the video title question: "What happens if everyone buys Index funds?" Answer: "It won't happen?" 😂

[@pdaniel8]

Vanguard owns 8.94% of MSFT Blackrock owns 4.74% of MSFT I think stocks are far from being move only by ETFs

[@antofempire]

That is great food for thought actually. I think as more money flow into passive investing. The market will become less efficient. To which point that the odds of success of active investing might start to improve and the statistics for active also improves. Then more people might flow back into active investing as people see statistics improving and wants to beat the market and the market becomes efficient again and the whole cycle begins again. There should should be an equilibrium point of the ratio between active and passive

[@TobyNewbatt]

Precisely this :) And I would love to know at what point this happens!

[@antofempire]

Yeah. I would be curious about that too. But I guess regardless it shouldn't change our investing thesis. Just take comfort that there are always people that treat stock market as casinos, while we might mock them we do need them. Everytime I need reassurance that we will never run out of active investor I just think Gamestop 😂.

[@ChrisShawUK]

@@antofempire yep, the stock market is just a mechanism to transfer wealth from the impatient to the patient

[@diytwoincollege7079]

It doesn’t matter what fund you’re in. It’s all the same 15 stocks. It’s really just a matter of how much they charge you.

[@codegeek98]

Large cap, sure. But total market...

[@Take-a-Stand]

Mutual funds not only charge modest management fees @~1-2%, investors also incur hidden trade fees. The fees for most Index ETF's are super low and ETF's are more tax efficient. So, why pay more in fees? I'm just saying. NOTE: The returns on ANY investment MUST be at least 5-7% because you have to beat the rate of inflation, or you loose money over time. Then there's short term, 1 year (@15% ) TAX on gains.

[@codegeek98]

That sounds pretty hideously high for a management fee. Even a target retirement year fund (where you pay even more to have someone else take it out of stocks and put it into bonds) shouldn't run that high.

[@wussboi]

Good video. But for your own understanding you should also understand the mandate and constraints of people/institutions that invest monies with hedge funds or active managers. It usually is because of the large volatility of index funds. Retail usually end up taking risk that fund managers are not willing to do so.

[@wussboi]

And it will also be good to understand the role of who is selling index funds to you: market makers

[@partyk1d24]

We also have to remember that most our parents (and peers for that matter) don't understand securitization of bonds let alone assets. Why hedge funds are way over valued. Even the "smart" ones love a gamble

[@whatwherethere]

In truth, there are not that many people in the market. Individual decision-makers make up a rounding error at best of the proportion of shares traded.

[@joechang8696]

there was an observation in horse racing and the trifecta. attempts by experts to pick the winners were generally unsuccessful. however, picking the losers was less difficult?

[@bob1234881]

But if 50% of the funds are index funds. Say i share loses 10% couldn't that the mean that 10% if all shares owned by index funds then have to sell. Then value goes down etc causes a big slide. Same for increases.

[@FirstMM]

I don't think it works like that. Just because a share price drops 10% doesn't mean that it instantly gets sold off by all the index investors. If anything, the index investor mindset of buy and hold long term reduces the impact of sell off's and market manipulation. My understanding (I may be wrong) is that if a single stock drops by 10%, and that stock happens to be e.g. Apple, 5.9% of the index is Apple, so the index drop is the allocation in the index of Apple stock, which is currently 5.9%, of the 10% drop, which would be a 0.59% drop in the index.

[@me-myself-i787]

Funds usually only rebalance once every few months.

[@ChrisShawUK]

It's the owners of index fund units who sell, not the fund themselves. Similarly, index funds only buy if new units are bought by investors (or dividends are received in the case of acc funds)

[@sal4856]

People get ito index funds after they get beat down picking and choosing, been in for yrs good times and bad times works for me,thats my advice for young people cost averaging throughout the work years

[@notpublic8961]

The real question is, how many active traders are needed to keep the stock market efficient? Nobody knows the answer to this, but my best guess is that it's not that many.

[@caddie1a]

I agree that index funds are a good investment, especially when young. It was my strategy for the first 25 years of my career. But as I grow older, I think buying good dividend paying stocks is the best way to retire. When the market goes down, there is a high likelihood that my stocks will continue to pay dividends or increase their dividends. Just my opinion.

[@whitneylevis]

I really appreciated this nuanced explanation of how the fears are overly simplistic

[@TobyNewbatt]

Appreciate the support 👍

[@mrhulls]

Seth klarman speaks about it in margin of safety. If everybody would buy index fund, the stock would be disconected to the fundamentals making huge bubbles.

[@Donkeyearsa]

It's not true that there is no active funds that can't beat the market after deducting expenses. There are a few but they are VERY few and far between. And the ones that do the managers of the funds are very heavy invested in their own funds. Warren Buffit is an excellent example. There is another example but I don't recall what they are called but the employees are the only inverters as the fund had kicked out all of the inverters who where not actual employees of the fund. As for my self over 90% of my investments are in passive investments as I took Warren Buffit's advice. "If you don't know what you are doing just invest in a low fee S&P 500 index fund."

[@AlanMitchellAustralia]

Great video. What would be interesting is comparing the long term share price of companies who are at sitting the margin of the S&P 500. Ie what happened when they entered the S&P500? Did their share price and PE ratio suddenly increase? What happened when they existed? Did their share price and PE ratio suddenly drop? This would help establish any causation of index fund inflation (rather than just correlation)

[@xman7695]

I think there was something like this, just like with the government bonds that get a bad rating I think. There should be some influx of money through more potential buyers. There's the crux though that most small added companies don't get much funds from index funds (especially when they don't have all 500) so there might be no significant change. SuperMicro Computers Inc or Deckers Outdoor Corp for example should have been added in March but there's no really significant rise in their stock price.

[@AlanMitchellAustralia]

@@xman7695 Agree that at the margin, smaller companies will only get a smaller amount of index fund demand due to their smaller market cap. But considering how popular the S&P 500 is, if a company slips out, every S&P 500 fund must then immediately sell all their shares in that company, and immediately buy lots of shares in the new company. Surely all this artificial buying and selling must accelerate the fall of existing companies and accelerate the rise of companies who replace them? Even if the absolute effect on the index is miniscule, the relative effect on the companies entering and exiting the index must be significant? Interestingly this video mentions indexes like the English Premier League. However what it doesn't point out is that in this index, the playoff final (getting promoted to the Premier League) has one of the biggest financial stakes of all games in world sport (bigger than superbowl), yet has almost no effect on the Premier League (index) itself. So huge relative gains/losses for the teams at the margin, yet no meaningful effect on the index. I therefore can't help believe that index funds operate similarly - adding artificial price and inflationary pressure beyond true intrinsic value. Thoughts?

[@RemotHuman]

as the global population stops increasing exponentially, will the value of index funds and the stock market stop increasing exponentially (will it stay positive 7-8% per year as it has been for the last 100 years?)

[@satty22]

Is the question not same as what happens if everyone buys the same stocks? I can see the argument though.

[@SaadonAksah]

Nice! Thanks for breaking it down 👍

[@jespersahnerpedersen]

"Grossman-Stiglitz Paradox": Perfectly informationally efficient markets are an impossibility since, if prices perfectly reflected available information, there is no profit to gathering information, in which case there would be little reason to trade and markets would eventually collapse.

[@drd4059]

Its better to start a company and actively influence the direction of your investment than to invest in stocks you have no influence over. The odds of success are much higher. Its also worth pointing out that the upper management of a company gets first access to company revenue (salary, bonus, options, etc) and consequently get a better return on investment than common shareholders. I realized this in 2000 and founded a company based on my expertise in photonics as a physicist. My ROI is better than any index fund. I encourage people with talent to start companies, grow the economy, and broaden the tax base (more successful companies lowers the tax burden for everyone). Capitalism happens on Main St.

[@alexanderkuzmenko7056]

All that arguing about passive and active lack of serious arguments and proper statistics. E.g. 10% of funds beat something, let's better discuss how much they beat! that could be way more important. If you truly believe in Index investing (most of which is based on success for S&P 500) just put your investment in s&p 500 with current valuation. It's typical cherry-picking when as good example of index investing S&P500 provided let's consider, Nippon in 80s (which just restored about half of year ago) or FTSE100 from 2000-now.

[@davidjohnston4240]

I find the "no one can beat the index" claims to be a little weak. Not because I see a lot of funds beating it, but because I can beat it. If I can, others can. I average a compound daily interest of about 0.7% a day. I win almost all trades, whether the market goes up or down because leveraged index ETFs come in long and short variants.This is how I replace the wages I lost when retiring recently. What I don't do is hold stocks overnight. I trade leveraged index ETFs intra day and never hold stock overnight. This isn't some savant skill. It's a strategy based on sound statistical principles. It helps that I am an expert on random time series analysis and entropy analysis, but I don't think it's essential. There is money left on the table with holding stocks overnight, but risk is a function of both volatility and time in the market. You can't control volatility, but you certainly can control the time you expose your money to the market and if you can do the mathematics, you can quantify risk and trade safely.

[@singjai]

Except regular people doesn’t set any prices its the market makers i can buy millions of meta and still wouldn’t move the price unless the market makers want it to move they can move all my buys in dark pools

[@steve6375]

But surely the fact that the share price of the top 7 (say) companies in S&P 500 continue to grow is because anyone who invests in that index fund is disproportionately investing in those top 7. So as more people invest in index ETFs, the top ones will always grow far faster than the others. Consider the case where an Index fund has one very big company (say 80% value) and all the rest make up the remaining 20% of the ETF - by investing in that ETF, most of your money goes into that one big company. Every company has corrections, etc. but that isn't the point. The point is that investing in index funds will always tend to force the share price of the top companies in those funds to do even better. In a way, actively managed funds are competing against this tide unless they also invest in the top 7. Or have I got this wrong?

[@TobyNewbatt]

I hope I explained everything in this video if you watched it all the way through :) If mispricing happens and a stock becomes too expensive, like you say, the active market can exploit the pricing differences. Yet...time and time again they fail to perform and there is still a HUGE amount of cash that is available to active managers and pickers. I'm not 100% sure on what point you are trying to make here? Generally, the companies priced the highest are priced that way for a reason, if you feel otherwise you are welcome to actively pick stocks :) Thats the beauty of the market.

[@thenecessitarian]

Buying spy doesn't raise or influence the share price of any stocks tracked by the spy.............

[@dysaster4521]

"picking the right stocks are like finding a needle in a haystack whereas buying an index fund is like buying the haystack" Most of my capital is in the S&P 500 but I do have a couple other investments they are PFE and LGEN, I also have a little bit of money in a gold ETC aswell

[@andrewlm5677]

Maybe the better way to say it is: “it is difficult to beat the indexes during a bull run like we’ve had in the last 15 years”. Despite what some people have witnessed in their “long” investing careers, the market doesn’t just go up and index investing isn’t risk free. I find it interesting that the bond market or even money market accounts are providing great rates with virtually no risk and the S&P is still reaching new ATH. Some people will be surprised when this comes to an end - I will not be. The stock market is driven by illogical humans making emotional decisions. At this point, I can’t see what would change the collective minds of the masses but I have no doubt there is something (something that will make as little sense as how we got here)

[@TimComley]

Index way forward but not at expense of all managed funds some excellent ones in Asia and Europe

[@pdaniel8]

PE ratio of 26.7x of a mag7 is high? Cmon ... MSFT has the same PE ratio as in 2015 AMZN had a much higher PE ratio in 2017

[@bencheevers6693]

That's how you get Nortel, still though probably the best option

[@ThomasVWorm]

I think, a misunderstanding is, that buying stocks is "investing". Most of the time it is not. Only new emissions of stocks result into invesstments. The stock market looks more like this: Imagine a carousel, where alternating you have money and stocks in the seats, where money is chasing the stocks and stocks chasing money. Nothing really happens here which makes the economy grow - and even if, only on paper. The entire carousel is a store for money. What we do see here, is not investing but saving, which is the complete opposite of an investment. And this is also why people do buy index fonds. They do not want to invest at all, otherwise they would start a business. They do want to save money.

[@IOFLOOD]

At the extreme, if there were only one buyer and one seller of individual shares, a tiny amount of non-index trading volume could have a dramatic impact on the stock price. High freq trading and market makers (fancy versions of front running and other arbitrage) obscures the real liquidity and trading volume. So you could easily end up to where 99% of trades are either index flows or front running, with only 1% betting on stock valuations, and not even know it.

[@tombennett831]

Why not just have a fund that buys the index but throws out the stocks being recommended by active managers that underperform the index? This wouldn't require much management expense and would overperform the index by the same magnitude that the active managers underperform the index.

[@TobyNewbatt]

Because if you do that...you become an active manager :) The point of index funds organised by market weight is that you have no idea what companies will do well in the future. Just because a company stock price does badly one year, doesn't make it a bad investment. Own everything, get the market return and you will beat most people :)

[@Dr.JubairsFinance]

Good points Toby

[@Drybones195]

Crypto (particularly Kaspa) > ETF’s/Index Funds. 8% per year doesn’t make anyone wealthy, unless they’re already wealthy to begin with. Kaspa is up 95,000% since its inception. Index funds, stocks, ETF’s, 401K’s, etc. are for suckers.

[@rogergeyer9851]

Re human nature, people are NOT going to stop trading. Also, BOTS will be trading a LOT, as long as there is economic incentive to do that (liquidity leading to more trading leading to more liquidity - virtuous circle). So the "worry" that everyone will own index funds and almost NEVER trade -- not a realistic worry AT ALL unless humanity changes beyond recognition.

[@SwiftlyJack]

The reason people not beat the index funds (or the market), is because they change their holdings to often. They think they have to "do" something when some big news comes. They think they have to have that special stock. That's all wrong. You just need to take the best (and often they are the biggest - they become so big, because they are good) and then hold on to them, until they show they are losing it to other companies. I do this, and I have been beating the market.

[@SwiftlyJack]

By the way, the index is doing so well, because the biggest (best) companies move the index the most. So, beating it is difficult, it just takes a few small (bad) companies to ruin your return.

[@kevinconnors2430]

This video had the potential to be very interesting but ended up basically saying nothing. I'm interested in the mechanics behind these ETFs. What *would* actually happen if everyone started buying SPY until there were no shares left to sell? Market makers would be forced to sell short on margin and potentially not be able to deliver. Youre incorrect when you say that index funds work like any other equity, where their price is a factor of supply and demand. It is, but only on a very minute level, for S&P, the price is a factor of the underlying assets and if the price of SPY diverges because of lots of buying, the price would ultimately not change at all because SPY tracks the underlying stocks and arbitrage bots will come in to correct the price. A video which talked about these mechanisms and theorized on what would happen if too many people bought (or sold) index funds would be interesting. But this video was not

[@daisybee2245]

Thanks for sharing! When index funds grow to over 85k with one provider, are we only covered up to 85k? I’m with Trading 212, thanks 🙏

[@TobyNewbatt]

I did a video on this topic recently check out my channel :)

[@daisybee2245]

Ooh thank you, I will have a look 😊

[@scott987]

There are SHORT ETFs on the sell side too.

[@PonderingsofIrishPresbyterian]

This is something I have been pondering over recently - thanks for this insight!

[@TobyNewbatt]

Glad it was helpful!

[@sidmishra290]

Index funds are for the retail investors, afaik retail investors aren't the biggest mover and shaker in the financial world.

[@rustymorning431]

You are not really answering the question. You are alway mentioning that "stocks pickers" do this or that. The question is what if there wasn't "stocks pickers" and everyone can ONLY buy index funds. Everyone is not the same as most people.

[@FarFetchedFlorida]

This guy doesn't understand the index. It's a combination of actively traded companies getting a weight. Buying an index automatically is the same as buying the equip equivalent list of equities at changing weights according to the periodic basis. The index literally is just a convenience tool so that you don’t have to buy 500 stocks to get into S&P 500 each week. As people pass away that other people are putting down stocks and changing the order of their weights within the index so each week the auto buys somewhat different allocations.

[@Presaria]

Would issues out more shares diluting the price

[@DarkoFitCoach]

BUY AND HOLD FOR ME BABY! BUY AND HOLD

[@syproful]

In essence, every company is a bubble. What company is sold at it’s net worth? Like you said yourself. Mister market regulates itself.

[@thorstenroberts4726]

So you're saying there is no possibility of systemic risk in everyone buying the same stocks? Got it...

[@matthewjames1172]

the problem is that index funds are derivative products.