What would happen if the entire stock market used Bogle's principles?

[Midpack]

There are various types of indexes and several methods of weighting. I haven't studied each of them in detail, but I thought most include X number of stocks by some metric (often market cap). And the methodology re: what stocks are included, how rebalanced, etc. is typically public ("rules based"), so there really isn't anyone making arbitrary, biased or frequent choices.

The broad or composite indexes include thousands of stocks, or all stocks for a given category. Again what stocks, rebalancing, etc. are clearly defined, and would fit most definitions for "passive" funds.

It's probably accurate to say most if not all commonly known traded/held index funds are passive in comparison to actively managed funds. Are there funds that call themselves "index funds" that are actually actively managed? Wouldn't surprise me, but I don't know of any...

 

[eridanus]

If everyone is passive and invested in passive funds then the function of the market intended to reward or punish business performance would be eliminated. This is bad.

There would be less volatility (no panic selling or buying on the rumor) but the market would still reward and punish (real) business performance. If Apple becomes a Nokia, it would get bumped from an index (presumably).

To expand on what mathjak wrote: Company stock would rise or fall depending on whether the index professionals include or kick out a stock. IPOs might seek approval from a professional because a stock is meaningless, or almost so, without being in an index. In the end, we'd be trusting the financial advisors more than we do now.