The Passive Investing Black Swan: Why “Set It and Forget It” Could Spark the Next Crisis

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More than half of U.S. mutual and exchange-traded funds are now passive—set-it-and-forget-it investments that blindly follow the indexes. While convenient, this concentration creates hidden risks. In the event of a major sell-off, the sheer weight of passive money could trigger violent market swings and magnify losses. True investing requires discipline, adjustment, and active decision-making—not blind faith in the herd. Ignoring this reality could turn passive investing into the market’s next black swan.

Episode Transcript

Speaker 1 (00:00):
The Watchdog on Wall Street podcast explaining the news coming
out of the complex worlds of finance, economics, and politics
and the impact it we'll have on everyday Americans. Author,
investment banker, consumer advocate, analyst, and trader Chris Markowski.

Speaker 2 (00:16):
The passive investing black Swan. Yeah, I think it's a
black swan. Black swan is something that well, I'm going
to characterize it. You know, Talb's book was phenomenal that
I would say, the overwhelming amount of people don't see
coming this one. The overwhelming amount of people don't see

(00:39):
this coming.

Speaker 3 (00:41):
We do.

Speaker 2 (00:42):
We do.

Speaker 3 (00:42):
So I guess technically it is a black swan, but anyway,
neither here nor there.

Speaker 2 (00:46):
You're familiar with.

Speaker 3 (00:47):
The phrase seeking alpha. Yes, that's what mighty managers are
supposed to do, seeking alpha, getting that higher rate of return,
and oftentimes, oftentimes to people seeking alpha, well there's no
real they don't have skin in the game, so to speak,
and in their efforts they inevitably let risk lead to ruin.

(01:14):
And we could talk about myria of hedge funds and
private equity and other famous blow ups over the years.
One of the tried and true ways that have been
used for a long period of time. You talk about
index investing, passive investing kind of set it and forget it.

(01:36):
For example, you invest in the S and P five hundred,
it's you know, whatever's in the s and P five hundred. Again,
they change things from time to time. You set it
and forget it. There's an issue with that right now.
Let me tell you why. About fifty five percent of

(01:57):
exchange traded funds and mutual funds right now are passive
fifty five percent, So that means they do what they do.
They do what they do. What happens with that amount

(02:18):
of money invested in passive funds if there is a
market Selloff's say, we have a major market correction, it's
gonna be pretty violent. And we just witnessed that happen
with the Liberation Day stuff. You watch the violent moves
in the market, and quite frankly, yes, the amount of

(02:41):
money that is in passive funds exacerbates that. Many fund
managers are basically throwing their hands up in the air.
So we can't you know, it's too difficult.

Speaker 2 (02:52):
Now there's too much money in passive funds, you can't
really make any money.

Speaker 3 (02:56):
That's ridiculous. We're not passive investors by any stretch of
the imagination. Do we use some passive funds to make
up portfolios. Absolutely, But like anything else, depending on what's
happening in the world around us, portfolios need to be
adjusted and trimmed, set it and forget it. Never never

(03:23):
a great investment strategy, never has been. Some people say, again,
you could talk about, well this has done this over
this period of time, and you can just set it
and forget. I get that, and it's not like you're
not gonna compound gains, but you can do much better. Again,
not by letting risk lead to ruin, but just by

(03:46):
proper portfolio maintenance. Something you need to look for, especially
now with the amount of money that is basically just
everyone doing the same exact thing. Watchdog on Wall Street
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