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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: Re: Confirm decision Date: 11/21/2003 11:36 AM
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I disagree. By buying funds instead of individual stocks, you're saying you can't outperform the market.

No, I am not.

By selecting index funds, you're saying no one else can either.

I think you are confused about what it means to beat the market (as most people are). First of all, when academicians talk about the "market," they are referring to the market portfolio of all assets (whether you are talking about money market funds, bonds, stocks, real estate, commodities, or whatever). In theory, you cannot beat the market return after adjusting for risk. I may be able to earn higher returns than the market portfolio, but I would have to take on greater risk. That's the theory anyway.

Since it is not practical to own the market portfolio, many have used various equity index funds as proxies -- the S&P 500 and Wilshire 5000 (i.e. "Total Stock Market Index") are the most prevalent. However, you are only selecting a small portion of all assets.

If you *really* believe that you can't beat the market, then you should try to own assets in as near a proportion to the market portfolio as possible. This would mean that you would want to make sure that you also have REIT indices, bond indices, etc. (Actually, you would borrow or lend to adjust your level of risk while holding the market portfolio).

So why would you limit yourself to the Wilshire 5000 equity index? Obviously because you want a higher return than the market portfolio, and the Wilshire 5000 is a great way to get a higher return over the long run.

That being said, why would it be wrong to further focus your portfolio on small cap stocks? What criteria did you use to decide that the Wilshire 5000 is the proper asset focus for CPAScott?

MadCapitalist
Who has studied finance theory in detail and thinks it is a crock of $#%&!
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