In fact, it might be better to do the exact opposite, because stocks deleted from an index tend to have significantly higher factor-adjusted returns than index additions, and stocks added to an index have "poor long-term returns," according to a study published in the Financial Analysts Journal in 2008 by Jie Cai, an assistant professor of finance at Drexel University, and Todd Houge, a chartered financial analyst and professor of finance at the University of Iowa.
1. Don't sell stocks deleted from an index, or buy stocks added to an index
The Russell 3000 index represents about 98% of the investable U.S. equity universe, and on June 25 about 261 companies will be added to the index and about 205 companies will be deleted from it.That fact alone shouldn't prompt investors to make buy or sell decisions, said David Zuckerman, a certified investment management analyst and chief investment officer of Zuckerman Capital Management LLC.
"For investors who own stocks that will be deleted from an index, the empirical data indicates that they should not sell their holdings," he said.
"Buying stocks that will be added to an index ahead of reconstitution is not a viable investment strategy, and the data suggest that returns may suffer if such a strategy is followed," he said. "Ultimately, decisions to buy and sell stock should be based on fundamentals and not on index reconstitution."
Buying companies based on an index's reconstitution is just one of four common mistakes investors make.
