Hey Jessinvestors

Investing is a cloak and dagger business, and as the search for profits becomes harder, the complexities of products seem to increase exponentially. Active managers have always been a bit of a toss-up, yes they're market makers trying to keep things more efficient, but they do nail you with all sorts of fees and makes it harder for small investors to see real returns on their capital or would not even consider your capital worth managing. 


## How managed funds work

Active managers search out trades and positions in their specialised market lets say its mining stocks and reviews their data of companies to try and pick the companies that would perform best in the sector and get a return from their picks either in increased stock prices or dividends from owning stocks. 

## How passive funds work

While passive index funds buy up positions in the entire market, so the theory is instead of trying to find the needle in the haystack, we buy the whole haystack and bet on the market as a whole instead of selective bets.

## The truth behind the passive index funds

Now I have no problem with either method, but I don't like about passive funds is the way its been pitched like its this sure way to make money. I see a lot of finance channels on YouTube and people who don't bother to do the research preaching it like it's the greatest thing ever and better than managed funds. 

They will always pitch that passive funds have outperformed the majority managed funds and yes that fact could be true but **firstly** they don't look at the returns on the minority of managed funds that do beat the index. 

**Secondly**, they don't account for the fact that markets are propped up by money printing and its not only gains but nominal increases due to inflation. 

**Then thirdly**, passive index funds buy-in at any price, they don't really think too much or have much say. If its an index fund in let's say gold, as money comes in they buy stocks off other funds at whatever price is available, so more money coming in means the more passive index funds own, the fewer sellers, the higher the price. 

So everyone piling into passive index funds creates a bit of a Ponzi scheme situation. 

![passiveindexfunds.png](https://files.peakd.com/file/peakd-hive/chekohler/BGSd1L4N-passive-index-funds.png)

## Too big to fail means system failure

Passive index funds sound great now and look great now because more money is coming in and theirs enough buyers to offset the sellers but market conditions never remain the same for too long. At the moment, some passive index funds are as large as 50% of certain markets, and this is where the systemic risk comes into play as these funds grab larger market shares, they gobble up liquidity and become the buyer of last resort. 

This removes price discovery, and non-index fund owned shares now sell it multiple premiums and continue to become grossly overvalued. The managed funds then continue to hold off and milk these funds as they need to continue to buy. 

Eventually, once it comes time to sell, the managed funds will want passive funds to take massive haircuts, why would they need these shares? As investors want to liquidate their "earnings" they'll find that the index fund is dumping to provide liquidity tanks with the entire market, and that's when we will see index funds exposed.

## The big retirement + insolvency 

As the baby boomers plan for retirement over the next five years, the richest generation in the world is going to want to pull their capital out of these markets eventually, and once they do, it could trigger a major fall on passive index funds. 

If you own passive index funds you may want to review their exposure in the markets and try to hedge your bets, look at taking out call options or trying to slowly ease out and move into something that holds its value like gold or silver. 

## Have your say

What do you good people of HIVE think? Are you invested in passive index funds?

So have at it my Jessies! If you don't have something to comment, comment "I am a Jessie."

## Let's connect

If you liked this post, sprinkle it with an upvote or esteem and if you don't already, consider following me @chekohler  and subscribe to my [fanbase](https://hive.vote/dash.php?i=2&fan=chekohler)


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