There's a line in "The Four Pillars of Investing" (p97) that says:
Can somebody please explain that a bit further? Let's say Company A makes up half the market (by market cap), and therefore half your "cap weighted" index fund. If Company A falls in value, wouldn't it then be over-represented in your fund? And wouldn't you be forced to either sell some Company A shares to rebalance, or buy more of every other company?Today, almost all index funds are "cap weighted." This means that if the value of a stock doubles or falls by half, its proportional contribution in the index does as well, so it is not necessary to buy or sell any to keep things in balance. Thus, as long as the stocks remain in the index, it is not necessary to buy or sell stocks becuase of changes in market value.
I dread writing this because it will surely come across as a dumb question, so be gentle!