Bubble, Bubble, Toil and Trouble
When investors buy without thinking, stocks get bid up to insane levels. Eventually, every bubble goes pop! Passive investing is pretty hot right now, but is it bubble hot?
Passive investing is the hands-off approach to financial markets. You blindly track a stock exchange with a fund like SPY or VGTSX and buy every stock going. It’s the opposite of active investing, where you put your business instincts to the test to pluck out individual winners. Passive investing will take care of you, but active investing will make you rich!
Now, check this out! In 2013, only 20% of invested money was passive. In 2017, it was 40%, and today it’s almost half. The passive trend isn’t slowing down, and clearly, stock pickers are getting outnumbered! It’s crucial that we active folk don’t go instinct, however, as we’re the ones thinking carefully about the markets. We’re the ones betting for or against stocks relative to each other on merit, and without us policing stock prices, the passive wave could bid everything up to insane levels. You know what comes next!
Some don’t think this matters, because as long as we have at least one person to separate the hot stocks from the stinkers, then all’s well! Others see more power going to the few. Fewer investors are calling the shots on what goes up and what goes down, endowing them with a huge responsibility to keep everything priced correctly. People make mistakes!
Luckily, markets have a way of sorting themselves out. If stock-picking takes on more power, then it inevitably becomes more attractive and wins over some passive folk. Hopefully, we’ll then have an overall equilibrium between passive and active. The trillion-dollar question is whether investors will cross that divide smoothly, or with the crash, bang, and wallop of a market crash! Hold onto your hats investors, you may soon be buying low!
