Quote:
Originally Posted by Slava
People don't have to have cap-weighted portfolios at all. Why would they have to?
Maybe your point about the averages is where the disconnect lies. I think that the financial industry in general does a terrible disservice to people using averages for a lot of things. Retirement planning being one of the worst offenders actually, which almost brings this discussion full circle!
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Absolutely, any individual portfolio is unlikely to be cap weighted. One person could be 100% in small caps, while someone else might have 100% Berkshire Hathaway. But on average, portfolios as a whole have to be cap weighted. As an example, the Telus market cap is about 22 billion, 22 billion of Telus is in various portfolios. On the venture exchange, PCS is in a similar business but has a market cap of 5.5 million, so 5.5 million of PCS is in various portfolios. So the "average" portfolio is cap weighted.
Some individual portfolios will outperform the average, but then others will underperform the average by an equal dollar amount. If one subset of investors beats the market by 1 billion dollars then some other subset must lag the index by 1 billion dollars.
Thus, since the market is pretty flat over the last 13 years, on average, equity portfolios are pretty flat over that time frame.
Obviously this excludes things like rebalancing and dividends, but all I was trying to explain was perceptions and comparing equities to mortgage paydown.