Those dangerous index funds!

[OldShooter]

It seems like everywhere I look I read something like this: " ... stock markets face a "major risk" from retail investors panicking and pulling out of equity-exposed exchange traded funds (commonly known as ETFs). As they withdraw, they will "magnify" any significant sell-off."

In every bull market that I can remember, there is always talk of danger from stocks that are held by "weak hands." These are purported to be amateur investors who only recently entered the market and who will panic and run at the first sign of a dip, selling into a correction and making things worse. There is even the story, maybe apocryphal, that J.P. Morgan bailed out of the stock market in 1928 when his shoe shine boy started giving him stock tips.

So, to me, all this blather about index fund investors panicking is just the same old stuff. The weak hands argument, changed slightly because the weak hands are supposedly now buying index funds instead of individual stocks. But in terms of holdings, all those weak hands in prior bull markets were probably holding a broad range of stocks where their selling would have similar effects to index funds' selling a broad range of stocks in today's environment.

So, yes, the weak hands are selling and probably will continue to panic sell. But I have seen this movie over and over. Things always turn out well in the end. There's nothing about index funds that changes anything.

Thoughts?

 

[davebarnes]

Thoughts:
1. I suck at picking individual stocks. My record is 2/4 down by 100% and 2/4 down by 50%.
2. My money is in 3 index finds (Dow, S&P500, and NASDAQ) with low (0.04%) drag. I sleep well. My investing time horizon is 35 years. After that, the kid controls.

 

[OldShooter]

... My investing time horizon is 35 years. ...

I don't think you qualify as a member of the "weak hands" crowd.

 

[Red Badger]

Thoughts:
1. I suck at picking individual stocks. My record is 2/4 down by 100% and 2/4 down by 50%.
2. My money is in 3 index finds (Dow, S&P500, and NASDAQ). I sleep well. My investing time horizon is 35 years. After that, the kid controls.

I'm over-complicated. 4 funds. Horizon? Until the long the dirt nap commences.
Sleep pretty good for now as well.

 

[misanman]

Having everything in a few index funds makes me feel good that I can bail out very quickly and easily.

 

[JoeWras]

Yeah, you hear something similar on the finance porn channels. It goes more like this: "Too many people in indexes, you need our help to find the better return..."

All these comments usually source from someone out to make money selling something other than index funds. Consider the source.

 

[Dtail]

Yeah, you hear something similar on the finance porn channels. It goes more like this: "Too many people in indexes, you need our help to find the better return..."

All these comments usually source from someone out to make money selling something other than index funds. Consider the source.

+1

 

[VanWinkle]

Yeah, you hear something similar on the finance porn channels. It goes more like this: "Too many people in indexes, you need our help to find the better return..."

All these comments usually source from someone out to make money selling something other than index funds. Consider the source.

+2

 

[mickeyd]

Major shake-outs in the markets like last week is one of the best internal aspects of investing. It automatically makes us all answer the Q "Am I OK with this?". If the answer is yes or "OK with what?", you probably have the correct AA.


Turn over and go back to that nap.

 

[mystang52]

I'm over-complicated. 4 funds. Horizon? Until the long the dirt nap commences.
Sleep pretty good for now as well.

Ditto. And as a contrast, a close friend was playing with a substantial amount of his money in some 30 (!) individual stocks. He told me all of the investing theories he used, and he was beating the market. I cautioned him that it might be easy to beat a bull market, but whenever the correction hits he might "beat" the market in that direction as well.
He's a close friend; unfortunately my prediction was correct. As to me, I also sleep well.

 

[Senator]

Program trading, as done by large firms who are always against index funds, cause more havoc than any retail investor.

 

[Mike93]

I found this recently and felt a little better about the current
up and downs.

From AAII Journal, Oct. 2017 "Stock Market Retreats and Recoveries"

Since the end of WWII, only six months on average
have separated the end of one decline of 5% or more
in the SP500 index and the start of the next 5%+ decline.

In more than 85% of the declines of 5% or more,
the market got back to breakeven in an average period
of only four months or fewer.

The SP500 took an average of only 14 months to recover
from the more typical 'garden variety' bear market
(declines of 20% to 39.9%) causing one to conclude
that if an investor can't wait a year, then they probably
have no business investing in equities.

 

[Montecfo]

It seems like everywhere I look I read something like this: " ... stock markets face a "major risk" from retail investors panicking and pulling out of equity-exposed exchange traded funds (commonly known as ETFs). As they withdraw, they will "magnify" any significant sell-off."

In every bull market that I can remember, there is always talk of danger from stocks that are held by "weak hands." These are purported to be amateur investors who only recently entered the market and who will panic and run at the first sign of a dip, selling into a correction and making things worse. There is even the story, maybe apocryphal, that J.P. Morgan bailed out of the stock market in 1928 when his shoe shine boy started giving him stock tips.

So, to me, all this blather about index fund investors panicking is just the same old stuff. The weak hands argument, changed slightly because the weak hands are supposedly now buying index funds instead of individual stocks. But in terms of holdings, all those weak hands in prior bull markets were probably holding a broad range of stocks where their selling would have similar effects to index funds' selling a broad range of stocks in today's environment.

So, yes, the weak hands are selling and probably will continue to panic sell. But I have seen this movie over and over. Things always turn out well in the end. There's nothing about index funds that changes anything.

Thoughts?

If you are an index fund investor you can only buy or sell the entire index. This is quite different than individual stocks. Net effects will be interesting. It's a new situation as index funds have grown in popularity.

 

[jim584672]

ETF index funds should have less impact on the market than the old open ended "priced on close" funds of the past. In the old days redemptions of shares would require sales in the market the next day. The modern ETFs are in effect closed end funds with a set portfolio. Only large players are allowed to create or redeem "creation units" in response to pricing aberrations between the underlying stocks and the fund. As long as the prices for the shares and the underlying stocks remains aligned no sales of the underlying shares will happen.

 

[garyt]

Thoughts:
1. I suck at picking individual stocks. My record is 2/4 down by 100% and 2/4 down by 50%.
2. My money is in 3 index finds (Dow, S&P500, and NASDAQ) with low (0.04%) drag. I sleep well. My investing time horizon is 35 years. After that, the kid controls.

I don't find it hard to pick stocks that beat the market. Off the top of my head the only one I have that didn't beat the S&P is DIS. The problem for me is finding enough names to diversify. So I fill in the gaps with index funds. I'm probably 70-30% funds.

 

[OldShooter]

If you are an index fund investor you can only buy or sell the entire index. This is quite different than individual stocks. ...

My point is that it's not different at all when you are talking about the "weak hands" in aggregate. In Olden Times each of the weak hands held a few stocks selected from a broad market. Now, with indexing, they hold a large number of stocks but much smaller positions. So when they decide to sell, the effect is the same because in total they all hold the same stocks in both cases. So the issue is simply how many weak hands are there and how skittish are they? Whether they hold stocks individually or they hold them in mutual funds (any funds) when they decide to sell the effect on the market is the same. Indexing has little or nothing to do with it.

 

[Montecfo]

My point is that it's not different at all when you are talking about the "weak hands" in aggregate. In Olden Times each of the weak hands held a few stocks selected from a broad market. Now, with indexing, they hold a large number of stocks but much smaller positions. So when they decide to sell, the effect is the same because in total they all hold the same stocks in both cases. So the issue is simply how many weak hands are there and how skittish are they? Whether they hold stocks individually or they hold them in mutual funds (any funds) when they decide to sell the effect on the market is the same. Indexing has little or nothing to do with it.

Selling small position in 500 or more stocks is unlikely to be the same as selling larger positions in fewer stocks. I do not know how you would determine how many "weak hands" there are at any given time.

 

[rayinpenn]

Ive observed a number of times that when the market goes into a nose dive everybody and his brother screams get out. A number of buy and holds people, with time on their side continue buying. Not sure index funds change any of that.

Buy a good stack at a great price and hold it forever ...

 

[audreyh1]

Selling small position in 500 or more stocks is unlikely to be the same as selling larger positions in fewer stocks. I do not know how you would determine how many "weak hands" there are at any given time.

I don’t think so. The retail guy is small. The professionals “slam” the indexes through ETFs all the time. What gets program traded? The entire S&P500, the NAS100, games with futures on same. The newbie retail investor dumping his mutual fund is tiny potatoes.

BTW most index funds are cap weighted. So it’s large positions in the top ones and tiny in many.

 

[karen1972]

Well one of the problems being that some of the biggest ETFs only have a small number of stocks in them. Many people think they are "diversified" because they are buying 3 or 4 of them without looking at the overlap and the ETFs seem to have a lot of group think going on.

 

[OldShooter]

Ive observed a number of times that when the market goes into a nose dive everybody and his brother screams get out. A number of buy and holds people, with time on their side continue buying. Not sure index funds change any of that. ...

Exactly. With a large number of people selling it does not matter whether each is selling small positions in a large number of stocks or each is selling larger positions in a smaller number of stocks. The result is going to be about the same.

(This is true even if index funds weren't in the picture -- its the same if the weak hands held conventional stock-picker funds.)

The only way this might not be true is if the current index mutual fund sellers had bought a different mix of stocks than the weak hands of previous bull markets but I don't think this is the case. In this market, the weak hands have been overwhelmingly buying the S&P 500. But IIRC the S&P is about 80% of the US market, so the weak hands of yore had to have been buying more or less the same stocks that the "evil indexes" are now holding.

 

[Montecfo]

I don’t think so. The retail guy is small. The professionals “slam” the indexes through ETFs all the time. What gets program traded? The entire S&P500, the NAS100, games with futures on same. The newbie retail investor dumping his mutual fund is tiny potatoes.

BTW most index funds are cap weighted. So it’s large positions in the top ones and tiny in many.

The move to index funds and ETFs is not limited to individual investors. Far from it. When people sell, there is no way to tell if they are "weak hands". They are sellers.

The fact that most indexes are cap weighted does not really change the discussion. When you own individual stocks and you sell, you pick and choose. If you own and index and sell, you are selling all the components at one time.

It is a difference. We can speculate on the impact.

 

[audreyh1]

The move to index funds and ETFs is not limited to individual investors. Far from it. When people sell, there is no way to tell if they are "weak hands". They are sellers.

The fact that most indexes are cap weighted does not really change the discussion. When you own individual stocks and you sell, you pick and choose. If you own and index and sell, you are selling all the components at one time.

It is a difference. We can speculate on the impact.

The big guys have been using indexes and index futures to slam the markets around during/causing disruptions for the last 20 years. I don’t see why anyone can be worried about the retails guy which is what started this thread.

 

[gayl]

I discovered in the last few years that my indexes (SPY, SCHA, SCHB, SCHF) consistently beat my individuals & matched my options but with much less risk. So that's ALMOST all I own. In the recent slip I only changed a little --- booking an upcoming economy flight (now upgrading to economy plus). The 1st retrenchment in retirement is a little unnerving

 

[Montecfo]

The big guys have been using indexes and index futures to slam the markets around during/causing disruptions for the last 20 years. I don’t see why anyone can be worried about the retails guy which is what started this thread.

I saw two points being made. One was that retail investors do not matter, and the other than the fact that people invest in indexes does not matter.

Individual investors directly hold 38% of the market at least as of 2013. It is enough to matter, especially since stocks are priced at the margin.

Passive holdings (ETFs and index funds) are north of 40% of equity holdings, and growing, having tripled since 2007.

I would argue both of these facts matter. A lot is being written on the impact of index investing versus stock picking. Most of that I see being written is wondering the impact on pricing long-term and in a big selloff. I am not seeing too much suggesting it will not matter.

But it may not. We don't know.