tag:blogger.com,1999:blog-5433839636644874439.post1177406368123734740..comments2024-03-04T13:37:11.022+00:00Comments on Canadian Financial DIY: What Would Happen If Everyone Did Passive Indexing?CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-5433839636644874439.post-49061357310116170942011-09-07T23:00:59.776+00:002011-09-07T23:00:59.776+00:00CCP, I believe that market inefficiency isn't ...CCP, I believe that market inefficiency isn't an all-or-none situation. The rise of indexing, especially that based on market cap weighting, gradually raises inefficiency. The biggest effect would be in areas where the giant ETFs are found - S&P 500, TSX 60.<br /><br />As for retail investors, I wouldn't paint them all with the same brush. Those who are newbie investors, without the time, inclination and skill (financial statement literacy, basic discounting) are the ones who would be fooling themselves. But the frequent posters of the Financial Webring I daresay would eat quite a few lunches of the professional mutual fund manager and big bank full service broker investment advisor.CanadianInvestorhttps://www.blogger.com/profile/05645767559302303541noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-52733682465118678632011-09-07T20:32:21.928+00:002011-09-07T20:32:21.928+00:00Interesting post. This idea has been around for a ...Interesting post. This idea has been around for a while, but it seems to be little more than a thought experiment.<br /><br />As more and more people begin investing passively, I would agree that there will be more opportunities for skilled active investors to exploit market inefficiencies. But if these opportunities come up frequently, then more and more people would abandon passive investing and become active themselves, which would quickly make the market more efficient. Somewhere along the line, there would be an equilibrium. I don't know where that point might be—maybe 30% of invested dollars invested passively? Who knows.<br /><br />But if retail investors think they can reliably spot market inefficiencies today because ETFs are more popular than they were five years ago, I suggest that they're fooling themselves.Canadian Couch Potatohttp://canadiancouchpotato.comnoreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-41767532118396538642011-09-06T18:27:12.338+00:002011-09-06T18:27:12.338+00:00I don't agree that there would never be a chan...I don't agree that there would never be a change in the price.<br /><br />I think the price would increase each year by 6.5 percent real, the average long-term return on U.S. stocks (I am giving U.S. numbers because that is what I know).<br /><br />The thing that would be stable is not the price but the valuation level. It would take a price gain of 6.5 percent per year for the P/E10 level to remain stable.<br /><br />The return paid to shareholders is compensation for them giving up the use of their money. Since the business enterprises making use of the money generate sufficient profits to support an annual gain of 6.5 percent per year, that is what would be paid.<br /><br />You would have to have people buying individual stocks for the individual stocks to be priced properly. In all invested in index funds, the relative values of the various companies would be messed up.<br /><br />Thought-provoking post.<br /><br />RobRob Bennetthttp://arichlife.passionsaving.comnoreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-47551361771118959872011-09-02T14:50:15.965+00:002011-09-02T14:50:15.965+00:00Anon, this situation is an artificial impractical ...Anon, this situation is an artificial impractical one to illustrate the extreme - 100% of people would only passively (pay the going price i.e. no price setters present) buy or sell the ETF. No one would buy/sell individual stocks.CanadianInvestorhttps://www.blogger.com/profile/05645767559302303541noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-55109907477492630622011-09-02T13:53:45.985+00:002011-09-02T13:53:45.985+00:00I don't believe it is correct that the prices ...I don't believe it is correct that the prices of the stock would not change if everyone invested in an ETF, as supply and demand for stocks would still change. Instead the prices of the stocks within the index would be highly correlated with one another, correct?Anonymousnoreply@blogger.com