I have read that index funds are 'passively managed', but I am not entirely clear on how they actually work. Could someone please enlighten me?
Let's assume I would like to invest in the popular Vanguard 500 S&P Index. If I put in $1000 today, that amount gets distributed among the 500 companies based on their index percentage (right?) and if I invest into it $5000 after couple of months, its going to be a similar procedure I think.
Question: Since stocks in companies can go up or down, who manages to make sure that my account is not severely affected by this? An example:
Let's say out of the $1000 investment, 25%($250) are invested in company
A. Now company
A has been doing ok for couple of weeks, but then due to some factors in that company its stock has been tanking heavily and doesn't appear to have a chance to recover. In this kind of scenario, what does happen? Am I responsible of moving my money from the index fund to a different fund entirely or do the managers of index funds do something about it? Basically I am not clear on what 'passively managed' is I think.