How do trackers deal with a falling company?

Prism

Reed_Richards wrote: »

In theory yes, but in practice this is a judgement call for the fund manager. He/she might also choose to invest in shares that are "bubbling under" the top 100. But look at the huge variation in market caps between those companies at the top of the FTSE100 and those at the bottom and you'll see then that it makes very little difference what happens at the bottom.

We are talking about a passive tracker fund here? There is no manager to choose anything. In your example it just tracks everything in the FTSE 100. It won't make any mistakes and it won't take any opportunities. However you are right, if it did track a few different stocks it wouldn't make much difference.

steampowered

El_Torro wrote: »

So how does this fund (or any other tracker) deal with this? Will they keep their holdings in Apple and watch the value go down? I guess if I put £100 of new money in this tracker when Apple is 2% of the market, instead of 2.82%, they will just buy £2 worth of Apple shares with the money instead of £2.82?

The underlying premise of your question is an example of "loss aversion bias". https://en.wikipedia.org/wiki/Loss_aversion

Selling out too quickly when a stock drops in value is a really bad way of investing. That approach is exactly why the majority of investors who select their own investments do worse than if they had just followed the market.

The market gives a fair value to any particular stock at any point in time. Future trends should already be priced into today's share price - so you simply don't know what will happen to the stock after that. If the price of Apple goes down there is a 50% chance it will go up and a 50% chance it will go down further.

Thrugelmir

steampowered wrote: »

That approach is exactly why the majority of investors who select their own investments do worse than if they had just followed the market.

Can equally apply to a tracker fund. When markets turn volatile and negative , can prove difficult to hold ones nerve. Current bull market isn't going to last forever. At which point we'll see very different posts on this forum.

xylophone

How do trackers deal with a falling company?

Use Trustnet?:)