Happy Reconstitution Day, Many Happy Returns!

Happy Russell Reconstitution Day, June 26, 2015 is the annual reconstitution day, at least for Russell 2000. Reconstitution refers to the moment in time when indexes make changes in the list of companies in their index. Most indexes have a certain number of company stocks included which is part of the name like the S&P500 or the Russell 2000. Obviously they have 500 and 2,000, respectively. For managers that manage index funds that are supposed to follow that index, they simply hold those stocks in the proportion called for, and then on reconstitution day, they do a lot of selling and buying to account for the stocks leaving the index and joining the index. They are restricted to making the changes on the day of reconstitution. It a great time to point out the difference between “indexing” and “passive investing” or the term we prefer to use “Evidence Based Investing”. Most people are aware that it is very difficult for active investors to reach the investment performance of the index most relevant to their investing asset class. So simply put “indexing works”, and works very well. Even Warren Buffett, fellow Nebraska graduate and Omahan, says that the average investor would be best served investing in index funds. As mentioned above, Index funds simply track a published index…they simply buy the companies in that index. However the indexes are arbitrary – based on known published lists of companies. Human beings in a conference room usually in New York City decide which companies to keep/remove in each of the hundreds or thousands of published indexes out there. They believe the companies...