[twiceaday]

And the relative values of those stocks will shift requiring rebalancing. You might be able to do that with new dollars for a while but hopefully, eventually, the swings are much more than new dollars and then what? Pay capital gains tax on sales to rebalance? Convince yourself the new random allocation is fine?

[yorwba]

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.

[dlenski]

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.)

[baobabKoodaa]

(deleted)

[yorwba]

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.

[pid-1]

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...

[yorwba]

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.

[malfist]

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

[jimmydorry]

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

[UncleDiaz12]

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.

[clbrmbr]

Philanthropically-minded people will move the winners to a donor advised fund which gives FMV write off without ever paying capital gains.

With index funds you never have the strong winners to do this with, and so giving is far less tax-efficient.