Lucky Chart Ape@luckychartape
The index has massive correlated risk. I will break down why I think a 50%+ sell off or worse is not only possible, but likely.
60%+ of Americans own equities, with 45% directly holding index ETFS.
The SP500 has concentrated 40% of its value into the top 10 companies. That means for every $1,000 that goes into an index etf, $400 goes to 10 companies, while $600 gets split between the other 490 companies.
If we look outside of the top 10 companies, about 40% of stock ownership for the bottom 490 companies is from index/passive positions.
Lets think this through.
Right now there are $45.8 Trillion in U.S retirement assets.
Roughly 35% of that is held directly in Index ETFS, and about 50% tracks the index.
The majority of directly owned stocks by retail investors are also the top 10 companies. When someone diversifies their passive index investing, they are just putting more money into the same trade.
Index funds now represent 52.7% of the total U.S investment market, and U.S about 65% of equities are held by individuals (accounting for mutual funds).
There is a massive Cohort in the market that has their retirement savings in the market. With 80% being held by people 55+ years old.
What happens when people are forced into selling off their index positions, or scared into selling them off?
The strength in equities is in large part built over 15-20 years of undying confidence in the market. Passively contribute, grow, retire.
What happens when all of these participants retirements are threatened and they lose confidence, and all start trying to get out at the same time. Decades of passive investment, all trying to get out at once?
The door isn't big enough for everyone to fit through.
I believe we will find out that when people sell off their individual stocks (which are in large part the top 10 companies), those make up 40% of the value of the index.. so it drags the index.. when people sell of index, it drags the top 10, along with the entire market.
Remember, 40% of the ownership in the top 490 companies are just passive index positions. The selling will cascade through the entire market, and this market is constructed so that selling anything is selling everything.
I could be wrong but that's what I think.
