Index Funds and downward pressure on market : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Was watching one of those financial shows either msnbc or cnbc on Friday night after DOW closed below 10,000. The manager of NY Stock Exchange trading floor was being interviewed. One comment he made caught my ear. He said that many index funds are not performing well this year. They showed a graph of the S&P. He indicated that if this causes people to liquidate (exit) these funds things could get ugly. Began to make some statement about "Humpty Dumpty" and then caught himself and said he really didn't want to thing or talk about it.

On another show I watched a round table discussion on stock market and one participant also mentioned that liquidations of index funds would accelerate market declines. Can anyone give me a more detailed analysis of this issue?

After watching a number of these stock market shows since Friday it seems to me that a number of the participants seemed to be very concerned. One other very interesting point was made about the New Economy vs Old Economy. Old economy still represents 98% of all employment.

-- Bob (, February 27, 2000


This opinion supports the saying. that 100% of the people think they can exit the market in time. Reality...... only 10% acually make it

-- kevin (, February 27, 2000.

What about banks, liquidity, and the price of property?

-- George (, February 27, 2000.

From: AMG Data Services - Flows: February 23, 2000, note their comment in parentheses.

Inflows to Equity Funds total $3.8 Billion for the week ended 2/23/00, with Technology Funds reporting inflows of $1.6 Billion, Healthcare & Biotech $1.2 Billion, and Aggressive Growth Funds $1.0 Billion (Large Cap Equity Index Funds report the largest outflow since 8/4/99);

-- Jerry B (, February 27, 2000.

Unless you are an astute single stock trader, which I have proved myself not to be, the only way to make money in the market is through index funds. If they aren't doing well, there's no reason for the average person to be in. Of course the Index 500 funds would not be doing well, but I wonder how the total stock funds have done, considering that they include the NASDAQ. Think I'll go to Vanguard and check it out.

-- Mara (, February 27, 2000.

An Index Fund is supposed to be representative of the index it is linked to. I.E. An S&P 500 Index Fund is supposed to keep its' assets invested in a weighting representative of the stocks in the index. i.e. If Walmart is 5% of the index than 5% of the indexs' money should be in Walmart. How does this impact the market?? In a rising market if Walmart goes up and becomes 3% of the index the fund has to go out and buy enough Walmart to increase it to 3% of their total holdings. In a falling market (like now.....), if Walmart falls in price and becomes 1% of the index, the index funds have to sell enough of their Walmart to lower it to 1% of their total holdings. The index funds can accentuate the movements - up or down of the stocks in the index. They contribute to market volatility. If shareholders start to take money out of the index funds, the funds have to do across the board liquidating of the stocks in the index. That can result in an automatic continuation of the downtrend. We have been seeing the "good" side of this in the rising market. It looks like we will now get to see some of the other side. The index funds are "no brainer" investments for those who don't want to think about their investments. When one walks around without thinking there can be some unexpected outcomes. Hang loose! Have some cash on the sidelines so you can pick up what they are forced to sell when we hit bargain basement prices.

-- REvans (, February 27, 2000.

Index funds, especially SP500 based, were once touted as the greatest thing since sliced bread, because their administrative fees were so small. They also had a good record.

I would say: read the SP500 chart and see how much you could have made in the past 12 months! I think the index fund myth is dying fast.

And as people are getting out of them, the dog bites its tail.

-- W (, February 27, 2000.

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