Almost everyone has had a hand in helping inflate the 'benchmark bubble'

Are the steep drops observed on the global stock exchanges evidence that a "benchmark bubble" is beginning to burst?

In my view, benchmark investing, say in the Euro Stoxx 50 index, is remote from common sense and conventional investment philosophy.

But millions of ordinary investors - who are, perhaps unknowingly, participating in the benchmark game - will have to foot the bill.

Stock markets have always changed with the times. Sometimes, they have been driven by common sense and complicated calculation models. Sometimes, they have been driven by fear, greed and the lemming effect.

Two years have gone by since one of history's greatest bubbles - the high-technology bubble - burst. Today, everyone agrees that this was a period of speculative and, in Alan Greenspan's phrase, "irrational exuberance".

Few investors think they will fall into that trap again.

Yet, practically every market participant - fund managers, pension funds, commentators - have had a hand in blowing up a bubble that is many times larger than the information technology (IT) bubble.

Benchmark or index-tracking is now a core part of any portfolio run by fund managers. It is an investment discipline best characterised by the lack of investors' knowledge, experience and thought: a conclusion you quickly arrive at when studying the selection criteria for the shares in the most popular indices.

The criteria used are market capitalisation - the individual companies' listed value - and free float - the proportion of freely available shares.

From an objective point of view, and in the opinion of professional investors, these two rank low on the list of significant factors.

Other factors - such as earnings, future earnings potential, intrinsic value and quality of management - are conspicuous by their absence in the composition of index-linked share portfolios.

So, one cannot help wondering what makes the majority of all institutional investors invest billions in the same shares, whose primary "quality" seems to be that they are listed.

What makes investors follow any fluctuations in, for instance, the Euro Stoxx 50 index, and then try to anticipate them by buying and selling in advance?

Unfortunately, the answer is disappointing. First and foremost, it is the fear of underperforming. Another explanation is that conventional investing would be too onerous and time-consuming, given the large volumes of managed funds.

And, finally, it is important to place the funds in highly liquid shares so that they may be disposed of quickly - to investors making long-term investments and who know what they have invested in, this should not be of primary concern.

Do the companies' listings in these indices not vouch for their security? No, far from it.

For a start, the companies' efforts to get such a listing may lead them to act in ways that are not in the best interests of the business: for instance, engaging in mergers or acquisitions; or, in some cases, tempting executives to withhold or distort the figures.

There are other problems. For instance, index shares are, on the whole, overpriced, since "the index-factor demand" has boosted these share prices to a significantly higher level than if they had not been listed.

If you think that you reduce the risk by purchasing a wide range of different shares, you are mistaken.

One would not think it possible that so many investors could show such irrational behaviour for such a long time. But, if anything, it is on the increase.

As with all other bubbles where investment behaviour was dictated by factors that were remote from conventional investing, it will all come to an end, and the bursting of the IT bubble will pale compared with that of the benchmark bubble.