WARNING: The Index Fund Bubble

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.”

Long term, however, it was found that adding a stock to an index has no permanent effect on the price

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

[RomilCPatel]

If graham ever has kids this will be his version of “the talk”

[MrSean]

The market will go up until it goes down. That's my prediction, free of charge.

[iheartlreoy]

“Index funds will collapse!!!” - active fund manager

[qingyunjian]

2:35 Warren Buffett betting $1 million is like me betting a quarter lol

[aks]

I love what you do, you're sharing with us insanely useful knowledge, I have a video idea, could you do a video ; where you literally start off from scratch, and you get a cashflow generating proprety, it would be a nice series of videos. Or: show us what you'd do if you were to start off from stratch.
If you ever see this ; just know you helped a lot of us.


Thank You.

[milesralls]

17 and been watching graham for two years, setting myself up for future financial success mainly due to you, thank you so much, this knowledge is crazy useful.

[chef_moquin]

92% of hedge fund managers who work with the market everyday can’t beat the market index funds? Just makes me think most people have no idea what the market will do next

[EphReinhard]

"Wallstreet": Index Funds are bad!


Warren Buffet: I recommend them. Invest responsibly.

[NickPeitsch]

When you get “the talk” from Graham...

You know what it’s about 😂

[AboutAysha]

It's kind of scary how I've been conditioned to frantically hit the Like button when I hear the dinging noise

[pedroperez]

Micheal Burry: predicts another bubble*
Graham: hold my $0.20 iced coffee

[HomebaseLHR]

12:30 “high-interest savings account”
*cries in European*

[CoachMikeYT]

As a professional financial advisor, I love your channel Graham. Love that you don't sell snake oil or gloom & doom.

[TheRealKingHarry]

Graham, this is one of your greatest videos. You put a lot of work into this video and it really shows. Keep it up!

[matthewcourtney]

Also I love this guys logic “if everyone sells all their stocks it’ll crash the stock market” well yea that’s how the stock market works

[Je.rone_]

12:51 *idk about the like button, but smashing the subscribe button was a good investment of my time about 2yrs ago💪*

[bodyloverz]

Vangard's S&P 500 funds have been outstanding since the 70's: low fees and high growth that is outstanding.

[uhohhotdog]

When I hear things like this I just assume someone is trying to drive down the price of index funds so they can buy cheap. The market is easily manipulated from the media.

[Snow_Pulse]

“The talk”
Oh no not this again
🐦 🐝

[AverageJoeInvestor]

*GREAT VIDEO GRAHAM!* This is a legitimate concern to have but if you are investing long-term like many people ARE DOING, then a stock market drop will not result in ALL PEOPLE selling their shares of the index fund! GREAT VIDEO GRAHAM! 😎👍🏻