Comment by mmaunder

xivzgrev 19 hours ago

What if the rise in index funds is a bubble on its own?

It's massive and increasing amounts of money that is not price sensitive and keeps growing. There's an underlying bubble message: "the stock market always bounces back, so keep plowing your money into it even when it's down".

Apparently passive funds are 60% of mutual funds / ETFs now https://www.avantisinvestors.com/avantis-insights/has-passiv...

Even more insidious is that this is in part driven by retail who are not paying attention. It's literally the definition of passive, hands off

So at some point, valuations will become increasingly disconnected from fundamentals. Active players will notice and find some way to take advantage. Passive yields will eaten. But at what point will the scales tip and people decide it's a sham and there are better places to park your money? That's when a huge bubble will collapse.

I don't know. Honestly don't know if that will ever happen because I'm not sure what a better investment for average Joe would be than a passive broad stock market index.

Reply View 21 replies

dasil003 19 hours ago

I've been invested largely in US index funds for a while now, and I've definitely thought about this. My conclusion is S&P 500 is too big too fail, everyone with various forms of power in the US (economic, political, etc) are incentivized to keep the music going. Sure it feels unsustainable, but there is no way going active can help me—I don't have enough access to the right people, and even if I did, it's better as a hedge strategy. Someone who has a billion dollars can easily pace a bunch of $10M bets on long-shot hedges that will mint a fortune when the music stops. Theoretically I could do something similar at smaller scale, but the people smart enough to have credible strategies are not talking to me, and even if they did I don't have the expertise to judge the advice (the super rich don't either, but at least AUM volume is some signal of competence).

Reply View | 2 replies
- YZF 17 hours ago
  
  The S&P 500 can and will crash at some point. It has and it will. That's part of the lifecycle of market psychology. We go through cycles of over valuation and under valuation. It's true there are many forces with interest in keeping the markets up but there have always been and it's always crashed because once the psychology changes there is no amount of intervention that can keep the market up.
  If you are invested for the long term then just don't think about it. If you want to diversify a little then go for it - slowly. Also keep in mind your US index fund is full of international companies anyways.
  
  Reply View | 0 replies
- y-c-o-m-b 17 hours ago
  
  I'm along the same lines of thinking. I got most of my funds in SGOV (I manually did t-bills for a while but too lazy to keep it going).
  > there is no way going active can help me—I don't have enough access to the right people
  It really comes down to this realization. Without access to what all these billionaires and their companies have access to, I just feel like a pawn with everything to lose.
  
  Reply View | 0 replies
r_lee 19 hours ago

It absolutely is.
With the rise of ETFs and 401ks people are incentivized (literally) by the US Gov to put their money in the S&P500
And the "instead of picking a needle in the haystack, just buy the whole haystack" only works if there is actual stock picking going on and you get to ride that, but now when there's so much passive investing, it's just everybody buying the haystack, even if there is no needle
Like with the ETFs and 401ks, they will happily buy as much NVDA at its ATHs, it's quite literally massive liquidity feeding orders all the time, coming from retail's monthly paychecks

Reply View | 0 replies
solatic 17 hours ago

US stock market index funds will crash when the US stock market crashes. That will require very large sums of capital to decide to move away from US capital markets. To give an idea of how much money would need to move - VTSAX alone is about $2.1 trillion, with hundreds of billions of dollars of shares of each Mag7 stock.
You basically need the world to decide that EMEA/JAP markets are collectively stronger than the US stock market, and to collectively move their capital outside the US to be deployed in EMEA/JAP. Moves away from Mag7 to US value stocks will be captured by the US stock market index funds; moves into commodities will be seen as opportunities to buy the dip before a market rebound. You can view attempts by US private equity to purchase real estate as attempts to hedge against overvaluation in US markets, but if the US has another Great Depression, those real estate purchases won't be able to fetch high rents or prices anyway.
In short, just follow the normal advice, which is not to put all your money into US domestic stocks, but to also purchase foreign stock market index funds, which help to hedge against the risk of the entire US stock market crashing. In the long run, US index funds are still a good investment - US courts still are quite powerful to settle contract disputes, the US does not have capital flight controls, and American business culture is still one of the hardest working, greediest forces on the planet - a Great Depression v2 would not change that.

Reply View | 4 replies
- YZF 17 hours ago
  
  All assets are correlated. When the stock market inevitably crashes, and it will, we just don't know when, so will other world stock markets. And the cycle will repeat.
  Capital is not going to "move away from US capital markets" because those markets tend to over-perform and will likely still over-perform. What companies are you investing in that are not nVidia, Google, Amazon, Meta, Apple, Open-AI, Anthropic etc. etc.?
  It's really hard to predict market crashes. I think it makes sense to be more cautious but also that's what could have been said a year or 2 or 5 years ago, in which case you would have missed a lot of potential gains.
  
  Reply View | 0 replies
- state_less 17 hours ago
  
  > US stock market index funds will crash when the US stock market crashes. That will require very large sums of capital to decide to move away from US capital markets. To give an idea of how much money would need to move - VTSAX alone is about $2.1 trillion, with hundreds of billions of dollars of shares of each Mag7 stock.
  I'd like to make a technical note about markets because I see this mistake repeated in the comments. The money doesn't have to move out of the US markets to somewhere else for the stock market to crash. It only requires a destruction of confidence. For a hypothetical example, suppose the S&P 500 closes at 7000 on a Friday, and everyone loses confidence in the S&P 500 over the weekend (for whatever reason). The market can open on Monday 3500 with not a share traded before the open (no money was moved out of the market), and investor portfolio values are now cut in half. Since confidence is broken, nobody buys the dip, and the market closes Monday down to 3000.
  It's an extreme example, but it's worth understanding the fundamental underpinnings. The markets are a confidence game. Sometimes we forget because we have good reason to be confident (e.g. in the S&P 500) and so it fades into the background that something like this could even happen, but it's not hard find these sorts of events in history.
  
  Reply View | 2 replies
  
  solatic 15 hours ago
  
  You are correct, but only insofar as destroying paper value. If investors have a firesale because the market would prefer to realize whatever value might be rescued, even at a loss, but the proceeds of the sale stay inside the US, then that capital is more likely to be reinvested in the US once investor confidence returns. This is the underlying reason why most long-investors should continue to hold their positions despite short-term losses. The fact that NVDA has a $4.6T market cap, as a product of about 24 billion shares multiplied by about a $190/share price, does not mean that the market believes that all 24 billion shares could be sold for that $190/share price. That is a convenient fiction that falls apart when investor confidence bursts, but that does not in and of itself truly represent value destruction (Nvidia employees will still wake up the next day and go to work), at least not until second-order-effects kick in (e.g. Nvidia employees leave because their RSU packages are no longer competitive compensation). People who stay long in the stock market can wait for investor confidence to return, in which cash is reinjected into the stock market, and the losses in diversified portfolios are not realized. If the S&P 500 investor takes a 50% hit in a crash, decides to hold, then the S&P 500 rises by 140% in the next two years, then the investor who held will still realize a nice return.
  The way in which that narrative does not happen is if the capital leaves entirely to be locked up in other investments; in the context of index funds which would anyway rebalance to rise with those other investments, if the capital leaves for other countries, to investments that are not covered by the index funds.
  
  Reply View | 0 replies
  
  YZF 17 hours ago
  
  Correct. The price of the market is the price people are willing to pay. It is not directly related to the move of capital. That said prices are also a function of supply and demand, if there is no demand (e.g.) for US stocks then it is more likely price will go down. If everyone wants to sell US and buy Europe, e.g. because they think the European competitors to Apple, Google, Amazon, nVidia and such will outperform, then presumably the prices at which those companies trade will trend down.
  
  Reply View | 0 replies
xivzgrev 19 hours ago

Related thought: maybe the rise in passive is a permanent buoy for positive market sentiment
In the past bad news led to jumpiness and people getting out, including retail. Now you have a massive amount of money that keeps going. So if you jump out..you see that so much money continues to plow in, and price starts going back up. So you come back in so you don't miss out. And on we go.
I think it's very possible passive investing is changing the dynamic, where downturns are more muted. It's overall a good thing but again, as I said above, it feels like it's setting up an even bigger ruin down the road

Reply View | 0 replies
tonfa 18 hours ago

I don't even think it's about active vs. passive index funds.
Even if people were to do active bets on equity, what matters is the amount of money flowing in the asset class, so as long as there's an infinite stream of long investments into equity (due to 401k, etc.), the prices will rise.
You'd need people to actively balance their allocation between asset classes rather than stock X vs Y to counter those equity bubbles, but I don't think it's happening (and equity becomes too big to fail given the link with things like pension in the US).

Reply View | 6 replies
- panarky 18 hours ago
  
  If equities are "too big to fail" then governments will do everything in their power to ensure prices continue to go up.
  If the right price for equities is 30% of their current value, and if achieving that price means the regime will fall in the next election (or sooner due to civil disorder), then the regime will not allow that to happen.
  A regime that controls its own currency has nearly unlimited power to prop up whatever asset classes it wants to, from bonds to equities to housing.
  Doing that has consequences like inflation which people don't like, and could cause them to vote the bastards out. But the regime could also print even more money for direct deposits into voters' bank accounts before an election.
  So it seems like equities have limited downside until there's a regime change.
  
  Reply View | 5 replies
  
  dash2 18 hours ago
  
  In theory this could be true. Is the US government actually doing anything specifically to prop up equity values?
  
  Reply View | 4 replies
variadix 17 hours ago

This is a fundamental misunderstanding of why index funds are effective. Being over invested into U.S. equities is a risk if you hold outsized U.S. index funds (esp. if you have a large allocation in the S&P500, you do not own the market portfolio), but there are other risks being invested into foreign equities as a U.S. investor.

Reply View | 0 replies
dgb23 16 hours ago

I think the almost opposite is the case.
Passive, (especially global) index funds doing so well and outperforming the vast majority of actively managed, general funds () is not a given, but they point to a different problem.
It means that most actively managed funds are still overpriced (fees), don't deliver efficient price discovery, and in some cases destabilize the market by making consistently wrong bets.
That's not the fault of index funds. In fact they make it easier for high performing investors who have deeper insights.
There are plenty of funds that don't compete on just on beating the index, but have other goals.

Reply View | 0 replies
bluecalm 16 hours ago

>>That's when a huge bubble will collapse.
Maybe there will be a "huge bubble" in the future but it doesn't look that huge right now. Forward P/E for S&P500 is about 22. That is 4.5% yearly return even if there is no growth beyond 2026. This is also real growth as earnings raise with inflation so nominal expected return is about 7% even if there is 0 growth beyond 2026.
Meanwhile risk-free rate (basically short term government bonds) is around 3.5% per year right now (nominal). That 7% is quite pessimistic as some "net growth" (growth - costs of generating it) is expected beyond 2026 and you can only get 3.5% "risk-free" I am not sure why people call current valuations crazy or what their expectations for "fair valuations" are. Equity risk premium seems to be still above 4%. Maybe that's on the low side but far away from bubble territory, let alone "a huge bubble".

Reply View | 0 replies
[removed] 17 hours ago

[deleted]

Reply View | 0 replies

ccc3 17 hours ago

I don't think that's exactly true of dot com and '08. In both cases the developing bubbles were identified and widely discussed in the years prior to the burst. The surprise in '08 was not that there was a bubble in real estate, but rather that a massive fraction of the financial system was built on leveraging that sector. To paraphrase Buffett, you don't know who's swimming naked until the tide goes out.

Reply View 0 replies

xivzgrev 19 hours ago

There's also the fact that US equities are now consistently best asset class. Used to be all over the map. But with rise of passive investing and global markets, capital flows to the winner. Success begets success.

If something changes and suddenly foreign equities start consistently beating out US then capital would flow accordingly. But the US still has a massive advantage from passive flows propping it up in perpetuity.

Reply View 1 reply

sbohacek 17 hours ago

International equities out performed US in 2025, e.g., see the chart near the bottom of the article in https://www.cnn.com/2026/01/04/investing/global-stock-market...

Reply View | 0 replies

snek_case 20 hours ago

Maybe not a particularly astute observation, but what I've seen in 10 years of investing is that the stock market seems to like to do the opposite of what most people expect. There's probably a game theoretic explanation to this, but as you seem to be suggesting, it basically comes down to: if the stock market was easy to predict and everyone could easily anticipate its movement, then everyone would make money, and this isn't really possible. There are big fish trying to take your money. The people selling you stocks or buying stocks from you do so because they think they are making the better move.

IMO we'll see a correction some time after people get used to the crash not coming. Maybe the narrative will shift back to "money printing means it can't crash" for a while, the market will go "risk on" and then we'll get a surprise correction.

Reply View 0 replies

le-mark 19 hours ago

> 2008 was sudden and unexpected by most. The dot com crash was sudden and unexpected by most.

In both those events there was clearly a bubble, and although no one could predict exact dates, corrections were expected.

Exactly the situation now. The problem is predicting the top. Example;You might estimate now is a good time to pull your assets out of the markets, but then the markets go up another 10%. Then a 20% correction happens and you attempt to time the bottom but miss it. Best case you buy back in at about the same point you left. With transaction fees and capital gains you’ve lost money anyway.

I did this in 2007, bought some rentals and missed a lot of gains post 2008.

Reply View 0 replies

mrbluecoat 17 hours ago

The only thing that crashed yesterday was silver and gold

Reply View 0 replies

fogzen 19 hours ago

Gold has crashed with previous economic crashes. In 2008 it fell 30%, silver fell by 50%.

Reply View 1 reply

m-s-y 18 hours ago

This happened yesterday. Not quite 30/50, more like 20/30

Reply View | 0 replies

PeterHolzwarth 17 hours ago

The dot com crash was absolutely expected - today's "cmon, get it over with! crash!" tone we see in regards to the AI bubble is hilariously reminiscent of the late 90s dot com bubble. It was the era that spawned the famous Economist leader "Crash Dammit!"

Reply View 0 replies

FrustratedMonky 16 hours ago

" different about this time is how much a crash is expected, which is reflected in the run up in the gold price"

Isn't this an indicator of a coming crash, not a counter point.

Doesn't Gold go up, specifically as people buy it as a hedge against a crash.

Reply View 0 replies

ls612 18 hours ago

Gold fell over 10 percent yesterday and silver almost 20 percent because Trump announced that the economist friendly choice would be nominated for the Fed. A lot of the precious metals market activity was based on fears about US monetary policy not fears of an imminent depression.

Reply View 2 replies

werdnapk 17 hours ago

Gold and silver were up the most they'd ever been the previous 1-2 days... followed by them going back down. So don't mention the fall without the literal massive rise that happened hours before.

Reply View | 0 replies
jb1991 17 hours ago

This is a good example of a comment taken completely out of context to indicate something that’s not true at all. Take a look at a chart of gold. Crash of 10% makes it sound like gold depreciated a lot.

Reply View | 0 replies