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Ask HN: What would happen if most of the money was in index funds?

6 points by jacobwilliamroy ↗ HN
So Warren Buffett has been telling laypeople to put their money in index funds in every Berkshire Hathaway annual report I've ever read. As I understand it, the allocation of funds in such an investment strategy is primarily influenced by the activities of actively managed investment funds. How would index funds work if they had a majority of the money? Or a supermajority? What if they had all of it?

2 comments

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rogerkirkness
At a certain point, active strategies that attempted to avoid the bad and only pick the good assets would become effective again. I suspect we'll learn during the next crash that this has become the case, that some companies really are more productive than others, and that indexing simply results in an everything bubble. S&P 500 seems like a particularly arbitrary example, because it's an actively managed list of companies. Any time you have consensus, it's safe to assume that the pendulum has swung too far.
yogesch
In principle, this is a good idea. But look carefully and you'll notice that in most developed markets, there's just too many index funds, and too many indices. You can find all kinds of specialized indices - most of which may actually be unsuitable for you.

If you read earlier advice from Buffet/Graham, they talk about being long term optimistic about the overall US economy. So if you really want a good passive way of doing things, just stick to the major market indices, like nasdaq100, snp100, etc. Be sure that the index you pick is liquid enough.

On a more practical note, talk to a financial advisor, at least initially, if you're inexperienced/untrained in this stuff.