Lets discuss the potential of an index fund bubble, whether or not you should worry, and how to invest long term to build wealth - enjoy! Add me on Instagram: GPStephan
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According to Michael Burry, the investor who predicted the 2008 Subprime Loan Crises and featured in the movie “The Big Short,” says that index fund investing is artificially inflating the prices of the stock market, because people are driving up those prices through index funds - and that’s causing an imbalance between what a stock is now valued at, versus what it’s actually worth.
Secondly, he also warns of what would happen in the event that everyone wants to sell their index fund at the same time - and how that would negatively effect the the price of smaller stocks within that index fund basket.
But is there ACTUALLY any truth to this?
First, I looked at stocks that had just been added to an Index to see if its price DID really go up…and then I looked at stocks to see what happens if they’re REMOVED from the index, to see if the price goes down. Here’s what I found.
When a stock is going to be added to an index, it’s announced AHEAD OF TIME - BEFORE index fund managers can actually go ahead and buy it. This leaves time for individual investors and speculators to buy in, anticipating it being added to the index within the coming week - and trying to make a profit.
When it was researched, it was found that stocks DO generally see a rise in price once it’s ANNOUNCED they’re going to be added to an index - but ONCE they’re actually added to the index, the pent up demand slows down - the stock price drops - and then it returns it a new “normal.”
https://seekingalpha.com/article/4009991-index-front-running-happens-stock-added-index
Long term, however, it was found that adding a stock to an index has no permanent effect on the price
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr484.pdf
First, to be a part of an index, you actually have to have the merits to be included…you have to be a successful company, have brand recognition, and otherwise have the attributes and market cap to be considered.
Second, the way index fund investing works, is that the fund is weighted towards the biggest companies that make up the largest volume…this means that only the biggest companies get most of the index investment, since THOSE make up the biggest portion of that “basket.” This also means the smaller companies receive very little “index fund” money, because they make up such a small percentage of the overall index.
Third, once a company is added to an index - it must actually PERFORM well, and much of its stock price movement will be from it’s earnings, performance, and ongoing development. Otherwise, if it doesn’t perform well, it’ll get bumped and the price will go down - causing a small percentage of the overall index to go down, with it.
So, given all of this…no, I personally don’t see there being any signs of an index fund bubble - and none of my research points anything to confirm this is a cause for concern.
HOWEVER…as with anything, at ANY time in the market cycle, I WOULD recommend you always:
Have a 3-6 month emergency fund in cash at all times - in a high interest savings account
Invest money you aren’t planning to touch for at least 10-20 years
DO NOT PANIC SELL anytime something drops in price - just stay the course and continue as normal
ALWAYS Diversify your investments - whether it be through index funds, real estate, or bonds
And always…no matter what…smash the like button
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness @gmail.com
The YouTube Creator Academy:
Learn EXACTLY how to grow an audience, rank videos on the front page of searches, build your brand, and turn that into another income source: https://bit.ly/2STxofv $100 OFF WITH CODE 100OFF
Get 2 Free Stocks on WeBull when you deposit $100 (Valued up to $1000): https://act.webull.com/k/Vowbik9Tm5he/main
My ENTIRE Camera and Recording Equipment:
https://www.amazon.com/shop/grahamstephan?listId=2TNWZ7RP1P1EB
My second channel:
http://www.youtube.com/c/thegrahamstephanshow
According to Michael Burry, the investor who predicted the 2008 Subprime Loan Crises and featured in the movie “The Big Short,” says that index fund investing is artificially inflating the prices of the stock market, because people are driving up those prices through index funds - and that’s causing an imbalance between what a stock is now valued at, versus what it’s actually worth.
Secondly, he also warns of what would happen in the event that everyone wants to sell their index fund at the same time - and how that would negatively effect the the price of smaller stocks within that index fund basket.
But is there ACTUALLY any truth to this?
First, I looked at stocks that had just been added to an Index to see if its price DID really go up…and then I looked at stocks to see what happens if they’re REMOVED from the index, to see if the price goes down. Here’s what I found.
When a stock is going to be added to an index, it’s announced AHEAD OF TIME - BEFORE index fund managers can actually go ahead and buy it. This leaves time for individual investors and speculators to buy in, anticipating it being added to the index within the coming week - and trying to make a profit.
When it was researched, it was found that stocks DO generally see a rise in price once it’s ANNOUNCED they’re going to be added to an index - but ONCE they’re actually added to the index, the pent up demand slows down - the stock price drops - and then it returns it a new “normal.”
https://seekingalpha.com/article/4009991-index-front-running-happens-stock-added-index
Long term, however, it was found that adding a stock to an index has no permanent effect on the price
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr484.pdf
First, to be a part of an index, you actually have to have the merits to be included…you have to be a successful company, have brand recognition, and otherwise have the attributes and market cap to be considered.
Second, the way index fund investing works, is that the fund is weighted towards the biggest companies that make up the largest volume…this means that only the biggest companies get most of the index investment, since THOSE make up the biggest portion of that “basket.” This also means the smaller companies receive very little “index fund” money, because they make up such a small percentage of the overall index.
Third, once a company is added to an index - it must actually PERFORM well, and much of its stock price movement will be from it’s earnings, performance, and ongoing development. Otherwise, if it doesn’t perform well, it’ll get bumped and the price will go down - causing a small percentage of the overall index to go down, with it.
So, given all of this…no, I personally don’t see there being any signs of an index fund bubble - and none of my research points anything to confirm this is a cause for concern.
HOWEVER…as with anything, at ANY time in the market cycle, I WOULD recommend you always:
Have a 3-6 month emergency fund in cash at all times - in a high interest savings account
Invest money you aren’t planning to touch for at least 10-20 years
DO NOT PANIC SELL anytime something drops in price - just stay the course and continue as normal
ALWAYS Diversify your investments - whether it be through index funds, real estate, or bonds
And always…no matter what…smash the like button
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness @gmail.com
is an Index Fund the same thing as an ETF?
Why would everyone sell their index funds at the same time? Doesn’t seem plausible
A recession isn't a stock market event. A recession has nothing to do with what the stock market does and people pulling money out of the stock market will not stop a recession. Well unless they spend that money and stimulate the economy
What does diversifying mean, when talking about index funds, because aren't the funds diversified already, to 500 different stocks in the case of S&P 500?
you have to look at "the fax", meme worthy
i hate the word if, i want fact
Thank you – good video!
Great video! Would small cap index funds also be affected by a bubble burst or just the large cap ones..?
I wanna smash the like button so much that I accidentally smash it twice
I prefer VOO over VTI or VTSAX
Warren Buffet is some of very few active stock investor who also recommends investing in index funds even though he outperforms the market because he knows it is not everyone's cup of tea.
LOL so this is since 2019
"high interest savings account" On what planet does that exist?
Do you know anything about C20 index funds
Impressive amount of information, points and counterpoints in less than 14 minutes. As a dummie interested in this subject, this video made me more knowledgeable! Thank you.
Your market analysis videos are 🔥🔥🔥
Graham, you should a video on pros and cons of dollar cost averaging vs investing a lump sum
Love it! Could you please do a take on index funds for current day?
Sound quality of this video is horrible. To thin and way to much gain. Interesting information but hard to listen to.
I destroyed the like button 😛
This video won't age well.
Thank you for your research and reasoning.
Great video! Very interesting!
My opinion is that index funds are great because you're investing in multiple companies and the chance all of them going bankrupt together is very rare
I put most of the videos on 1.5X the speed. With Graham, the normal speed is perfectly fine.
Automate is truly the safest platform you can invest your funds.I must commend the platform, they are always consistent with withdrawals and their payments are automated always making me happy💯..
In all the arguments you assume that participants of the system remain SOBER, NOT GREEDY, AND UNCORRUPT. But That rarely happens. Like we saw in 2008, the Rating agencies gone corrupt causing all CDOs to fail. Who knows how the Indexing Mechanism might go corrupt fulfilling Michael Burry's prophesy.
Meanwhile a year later index funds are making even more money, if you'd invested when this video released by now you'd have made about 40% profit on the S&P500 from it's market growth alone.
He is one in a million, best among many, most trusted , I almost gave up on trading then I met him through a friend, Austin is the most trusted trading expert who helped the life of my family and I ,.
What is the best ETF index fund?
Idk man, warren buffett, charlie munger, Jack bogel are all concerned about the fact that over 40% of the market is in passive index investing which is being traded actively
so the guy that predicted the market crash in 08 is saying this? idk man
Does this guy have a video on how he researches things?
Index fund IS actively managed fund. I don't get it why people keep saying the opposite. They're actively managing contents and weights of the stocks. Just like every other active fund