Passive Is the Dominant Player in the Stock Market

 

It’s no secret that passive investing has revolutionized how investors put their money to work and now is the primary strategy used to allocate funds in today’s financial markets. Vehicles like index funds and exchange-traded funds (ETFs) are the most popular way to gain stock market exposure, in both taxable and retirement accounts.

The conventional wisdom is that index funds are wonderful innovations and have only benefited individual investors with higher returns and lower fees. The only individuals getting hurt are Wall Street fat cats with high fees. Even Warren Buffett, arguably the best investor of all-time, goes out of his way to praise indexing. He thinks highly of Jack Bogle, founder of indexing giant Vanguard, saying, “Jack did more for American investors as a whole than any individual I’ve known.”

Although it is true that up until this point in time, index funds have been an enormous positive for investors, serious problems are surfacing. Let’s review how the stock market is supposed to work historically, and then we will highlight how index funds have turned the system on its head.

Next Page – The Old School Stock Market