Markets have changed and evolved radically over the last 30 years. As you can see on the chart below, in 1995, 80% of the equity trading could be traced back to active managers, mostly mutual funds. Only 10% was speculative and the rest were marginal actors, for the most part. In today’s world, passive strategies are responsible for the majority of the daily equity trading (64%). The implications are significant: 30 years ago, most decisions where made by humans, and were valuation based decisions. Today, the majority of trading is algorithmic, and the goal is not to find the cheapest stock, but to replicate the index as much as possible. In a bull market with vast liquidity, equity passive strategies are difficult to beat, due to low costs and zero tracking errors for the most part. In a bear market, full replication may not be the appropriate approach, as corrections affect stocks differently and opportunities arise, and passive behavior means the strategy will sink exactly the same as the index, which requires enormous discipline to follow. The first index fund was created in 1971 and the first ETF was created in 1993, but the massive adoption happened after the gfc thanks to QE. It will be interesting to see how passive investors react to a bear market, and how the trading composition changes.
Want to know more? join Fund@mental here https://www.myfundamental.net
#iamfundamental #soyfundamental #wealthmanagement #familyoffice #financialadvisor #financialplanning
Commentaires