As an individual buying an index and ideally at a low cost to you is a good thing because all the companies which provide indexes remove the “dogs” and add the “stars” to the index. On the face of it removing companies which no longer mean the criteria and replacing them with better ones over the long term means the index will increase. If you wish to look at the index of the S&P 500 since the index has been kept over the long term it increases.

One method to play this changing of the indexes is to buy companies which are scheduled to be included in the index. David Berman wrote about a column called the The Index inclusion roller coaster. The reason this is a strategy is when the index changes funds which track the index now have to buy the new companies and sell the old ones. Unfortnately, while there will be an impact the impact tends to 1 to 5% increase in price but it falls back to normal. In 2004 McKinsey & Co offer a very clear conclusion Yes the shares typically rise but it is short lived (20 days or less). McKinsey believed there was no permanent price premium for being included in the index. What happens is the stocks volume tends to increase.

Linking to dividend paying companies, most of these companies are in the index for a very good reason they consistently make profits. The consistency will attract more investors looking for good investments. Being in an index is good and understand if the market lost 10% of its value, indexes would sell so there would be selling of the shares, but the profitable ones will go back to what is normal because they are good companies to own. Remember to stay at the basics.

There are more questions than answers, till the next time – to raising questions.