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At what point do index funds become unreliable?
Private investors as mutual funds are a minority of the market.  Institutional investors make up a substantial portion of the long term holdings.  These include pension funds, insurance companies, and even corporations managing their money, as well as individuals rich enough to actively manage their own investments.   From Business Insider, with some aggregation:   Numbers don't add to 100% because of rounding.  Also, I pulled insurance out of household because it's not household managed.  Another source is the Tax Policy Center, which shows that about 50% of corporate stock is owned by individuals (25%) and individually managed retirement accounts (25%).   Another issue is that household can be a bit confusing.  While some of these may be people choosing stocks and investing their money, this also includes Employee Stock Ownership Plans (ESOP) and company founders.  For example, Jeff Bezos owns about 17% of Amazon.com according to Wikipedia.  That would show up under household even though that is not an investment account.  Jeff Bezos is not going to sell his company and buy equity in an index fund.   Anyway, the most generous description puts individuals as controlling about half of all stocks.  Even if they switched all of that to index funds, the other half of stocks are still owned by others.  In particular, about 26% is owned by institutional investors that actively manage their portfolios.   In addition, day traders buy and sell stocks on a daily basis, not appearing in these numbers.  Both active institutional investors and day traders would hop on misvalued stocks, either shorting the overvalued or buying the undervalued.   It doesn't take that much of the market to control prices, so long as it is the active trading market.  The passive market doesn't make frequent trades.  They usually only need to buy or sell as money is invested or withdrawn.  So while they dominate the ownership stake numbers, they are much lower on the trading volume numbers.   TL;DR:  there is more than enough active investment by organizations or individuals who would not switch to index funds to offset those that do.  Unless that changes, this is not a big issue.