total wealth tactics

Inflation is still at elevated levels, and the Federal Reserve is signaling no near-term end to its quantitative tightening policies. Investors looking to generate higher levels of income from their investment portfolios should consider Real Estate Investment Trusts, or REITs. In case you’re not familiar with them, REITs are companies that own real estate properties […]

The secret momentum driver elevating market indexes to all-time highs, again and again, is none-other than the “passive investing” trend. It’s going on unbeknownst to even the drivers of this momentum bus.

Investors who don’t understand how big an impact money flowing into index funds has had on the market’s performance probably have no idea what could happen if the trend stalls, or worse, reverses.

Here are the pitfalls of passive investing and how bad the fallout could be if passive investors discover the trap they’ve entered, turn active, and sell.

The almost self-perpetuating cycle of rising markets attracting passive investment capital into index products, which boosts the value of indexes as money flows into them, which attracts more sidelined money and compels investors to sell actively managed funds and buy passive index-following funds, which have been lowering their management fees since they aren’t actively managed, which attracts more investor capital into the growing universe of index funds, which keep increasing in value as sponsors and their authorized participants buy all the underlying stocks in the indexes they track when investors buy those packaged products in the open market, is, almost self-perpetuating.

But you know the saying, almost only counts in horseshoes and hand grenades.

The truth is passive investing’s virtuous positive momentum manufacturing feedback loop isn’t a guarantee.

What passive investors aren’t seeing, because they aren’t looking through or behind the mad rush into what looks like a better mouse trap, is that more money flowing into index funds increases systemic risks inherent in the investment.