/biz/ - Business & Finance

Let there be two groups: active investors and passive investors.

Active investors pay for teams of analysts, they do trades more frequently so they pay higher brokerage fees + the bid/ask spread loses them money too. Uncle Sam is not favouring active investors neither.

Passive investors pay BlackRock or Vanguard small annual fee (or nothing at all), with very small counterparty risk. They also pay spread, brokerage fees and taxes but much smaller on average than active investors. If they have enough money and want to avoid counterparty risk and fees, they can go full autism and buy individual stocks themselves and just never trade one for another - hodl as you would the ETF tracking index.

The two groups together hold the whole stock market and thus will make, by definition, whatever the market returns minus their respective expenditures. Since passive investors have much smaller expenditure than active investors, they will get, on average, higher returns than active investors.

It is self-explanatory that passive investors are freeriding on active investors's efforts that set the prices.

Since people are becoming increasingly aware of this, more of us plebs turn passive with each passing year.

If everyone turns passive, the stocks are no longer priced well enough and a bubble like we've never seen before emerges.

Is there a mechanism that will correct the prices? How would you force people to actively trade? If you make index funds illegal - people can practice so called "closet indexing" - they will just buy stocks hap-hazardly and hodl forever. My final question - why weren't people doing it prior to index funds? It is basic arithmetic. Before index funds were created, you could just buy random stocks and never sell. Most of the stocks would fail but a few of them would make your portfolio beat the average investor by the expenditures they have to pay.

>>53252955
Looks like you've started to understand