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Houge study finds index rebalancing hurts mutual fund performance

A story about the benefits of passive, buy-and-hold investing cites a study entitled "Index Rebalancing and Long-Term Portfolio Performance," by Jie Cai of Drexel University and TODD HOUGE of the University of Iowa. Cai and Houge did a study of the Russell 2000 Index, composed mainly of small-cap stocks. Not only did the authors discover that index rebalancing hurts performance, but stocks taken out of the index end up performing better than the index itself. To increase buy-and-hold returns, in other words, you should put deleted stocks back into your buy-and-hold portfolio.

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