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Comment by yorwba | Hacker News Reader

I thought the point of index funds weighting by market cap is that they don't require rebalancing, because the weight of stocks in the index exactly tracks price movements. You just keep holding the exact same number of shares, and more valuable stocks automatically take up more of your portfolio.

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Yes, this is one of the benefits of a cap-weighted index fund.

It doesn't eliminate the need for the fund to rebalance, because of companies moving in and out of the index criteria.

But it certainly vastly reduces the need of the fund manager to trade.

(Also, stock buybacks and new share issuance should in principle not change a company's index weight, but in practice they sometimes do.)

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If you pick stocks with the correct weight to track the index, you're effectively running an index fund. And so you don't have to rebalance to keep tracking the index.

1 If you never rebalance, you're never adding new stocks to the index, nor removing stocks that do not belong to it anymore.

2 You need to rebalance to take corporate events into account: new stocks, buybacks, dividends, etc...

You can add stocks whenever you put money in. Whether that's because you got your paycheck or a dividend or some other income is kind of irrelevant. And you can remove stocks when you take money out. But you probably shouldn't start selling one stock to buy another just because their prices moved, unless you have information that lets you time the market.

But then you wind up with a portfolio that isn't balanced and isn't tracking like an index fund. An index fund doesn't simply buy a flat amount of stock and hold it, they buy stock in proportion to the relative weight of the exchange. Which is always moving

Market cap weighting is special. If company A has 500 shares, company B 500 also, than a fund that has 5 shares of A and 5 of B is market cap weighted.

And what happens if company A issues more stock? Company B is delisted? Company C is now listed? Company A and C merge? Company A spins off it's most valuable side business into it's own independent listing company?

Most transactions just getting the results is all you need

This is only true if those 500 shares had identical value, as market cap is the number of shares x the price.

They do have identical value.

500 shares of company A is worth 100% of the market cap of company A.

500 shares of company B is also worth 100% of the market cap of company B.

So if you have 5 shares of each, you'll have 1% of the market cap of each, even if one of those companies finds the cure for cancer or turns out to be a money furnace.

Indexes rebalance frequently. The "correct weight" today, won't be the correct weight in a year.

What are you talking about? Those index fund are constantly rebalancing. This is why you buy an index fund, so you don’t have to constantly rebalance your portfolio.

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