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URL:  http://boards.fool.com/index-funds-in-fact-buy-high-and-sell-low-18544303.aspx

Subject:  Re: More Index funds ????'s Date:  2/5/2003  5:18 PM
Author:  CABob Number:  35661 of 75642

Index funds in fact buy high and sell low whenever they replace a stock in the index. They rid themselves of the slackards {your outa here} and replace with a stock that has shown to be the new rising star. He continues to assert that the replacement stock will then have a above average drop over the next year as it has peaked out.

I don't think this is true. Most indexes and therefore the funds that follow them are market weighted. When they first appear on an index they tend to be small in comparison to others on the index. If they are sucessful and follow the business cycle of so many they then grow in size (the rising star) and the index takes advantage of that growth as well as the dividends (if any) that the company pays out. When the company becomes the slackard I would concur that the price will drop but can think of no reason that the drop should be more than average. The slackard is then replaced by another rising star but which has a low position on the index list.
My thinking is about broad based indexes and may or may not share traits with something like a sector fund. If something is wrong in my thinking I would be happy to hear others ideas.

Bob
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