Ask HN: What happens if everyone invests in Index funds and stop day trading? (2024)

FAQs

Ask HN: What happens if everyone invests in Index funds and stop day trading? ›

If all money (or a significant portion) was only invested in index funds, liquidity of individual stocks would decrease. That would result in a counterbalancing increase in volatility.

So, a biggie that we often hear is that somehow the flow of assets into indexes will cause the markets to be less efficient. It'll cause these, sort of like, market dislocations.

If everyone traded in the stock market, it would lead to some interesting and potentially volatile consequences: Increased Volatility: With everyone buying and selling stocks in the stock market, prices would likely swing more dramatically.

"In my view, for most people, the best thing to do is own the S&P 500 index fund," Buffett had once said. "The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low-cost way," he further added.

If you're new to investing, you can absolutely start off by buying index funds alone as you learn more about how to choose the right stocks. But as your knowledge grows, you may want to branch out and add different companies to your portfolio that you feel align well with your personal risk tolerance and goals.

Capital gains taxes on that sale are yours and yours alone to pay. To get cash out of an index fund, you technically must redeem it from the fund manager, who will then have to sell securities to generate the cash to pay to you.

While they offer advantages like lower risk through diversification and long-term solid returns, index funds are also subject to market swings and lack the flexibility of active management.

If such withdrawals are done in America, there would be an immediate economic and financial crisis. Some of the greatest recessions have occurred from the partial influence of bank runs. The banks would experience a bank run.

This would make stocks less desirable to own, but the price couldn't fall, because there would be no buyers to transact at the lower price. The supply of stock couldn't change either, because companies could not buy back stock because no one buys.

When there are no buyers, you can't sell your shares—you'll be stuck with them until there is some buying interest from other investors. A buyer could pop in a few seconds, or it could take minutes, days, or even weeks in the case of very thinly traded stocks.

What does Dave Ramsey say about investing in the stock market? ›

Invest 15% of your income in tax-advantaged retirement accounts. Invest in good growth stock mutual funds. Keep a long-term perspective and invest consistently. Work with a financial advisor.

Index funds are a great investment for building wealth over the long-term. That's one reason they're popular with retirement investors.

While indexes may be low cost and diversified, they prevent seizing opportunities elsewhere. Moreover, indexes do not provide protection from market corrections and crashes when an investor has a lot of exposure to stock index funds.

An index fund usually owns at least dozens of securities and may own potentially hundreds of them, meaning that it's highly diversified. In the case of a stock index fund, for example, every stock would have to go to zero for the index fund, and thus the investor, to lose everything.

Short-term downside risk: Index funds track their markets in good times and bad. They can be volatile places to put your money, especially when the economy or stock market isn't doing particularly well. When the index your fund is tracking plunges, your index fund will plunge as well.

Disadvantages of index funds. While index funds do have benefits, they also have drawbacks to understand before investing. An index fund tends to include both high- and low-performing stocks and bonds in the index it's tracking. Any returns you earn would be an average of them all.

Lower risk: Because they're diversified, investing in an index fund is lower risk than owning a few individual stocks. That doesn't mean you can't lose money or that they're as safe as a CD, for example, but the index will usually fluctuate a lot less than an individual stock.

Indexes are set portfolios. If an investor buys an index fund, they have no control over the individual holdings in the portfolio. You may have specific companies that you like and want to own, such as a favorite bank or food company that you have researched and want to buy.