The U.S. financial sector is now 8.4% of GDP.  It grew from about 2% of GDP in the late 1940s to about 8% in 2000; it’s been roughly flat since.  From the Wall St. Journal:


My question: Suppose buy-and-hold investment strategies were near-universal.  To be more specific, suppose 90% of all investment dollars were used to robotically purchase the market basket, then hold these assets until retirement.  In this scenario, would the finance sector dramatically shrink?

Intuitively, it seems like it should.  The thick market for buy-and-hold dollars would drive management fees below index funds’ already low rates.  And if almost no one tries to time the market, it’s very hard for sophisticated insiders to get rich.  There aren’t enough fools left for the “greater-fool” strategy to be amount to a large share of GDP.  In such a world, it would be hard for the value-added of finance to exceed a few percent of GDP.

Of course, if you’re the only active trader left in a buy-and-hold world, finance could be very lucrative indeed.  Just adjust your portfolio every morning when you read the newspaper and you’ll clean up.  But in my scenario, there are still plenty of competing active traders.  They only control 10% of the dollars.  But that leaves an army of financial sophisticates competing to fleece a relatively small pool of suckers.

Still, finance is not my area.  Am I missing something important?  If so, what?

P.S. I am well-aware that buy-and-hold was very rare in the 40s, 50s, and 60s.  My conjecture is that finance’s share of GDP skyrocketed despite the rise of buy-and-hold investing.