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Cap weighting

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
1nvest
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Cap weighting

#463750

Postby 1nvest » December 7th, 2021, 9:42 am

It's quite common to see claims that you should hold the capitalisation weighted portfolio, buy the market in the market proportions.

I note however that the global cap has stocks at around $90Tn, land/properties are up at $280Tn whilst debt is $250Tn.

In which case, as you can only buy a sampled version, over that of buying a equal proportionate share, the cap weighted portfolio should be of the order of a 90% mortgaged home and stocks of value 32% of that house value. £280K home value, £90K in stocks, £250K mortgage.

Which is pretty high leverage, £120K capital, £370K asset value, over 3x leverage factor.

Rebalancing to that ... and anyone know where a retiree might secure a £9M mortgage and/or where a £10M property might be up for sale? :D

tjh290633
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Re: Cap weighting

#463759

Postby tjh290633 » December 7th, 2021, 10:00 am

1nvest wrote:It's quite common to see claims that you should hold the capitalisation weighted portfolio, buy the market in the market proportions.

Totally impractical for a private investor. If you want to do that, a fund is the only possible option.

Suppose you have two shares, AstraZeneca and Marstons, AZN has a market cap of £128,205million, Marstons £429million.

So you have £400 in MARS and £128k in AZN. Ridiculous suggestion.

TJH

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Re: Cap weighting

#463767

Postby dealtn » December 7th, 2021, 10:23 am

1nvest wrote:It's quite common to see claims that you should hold the capitalisation weighted portfolio, buy the market in the market proportions.

I note however that the global cap has stocks at around $90Tn, land/properties are up at $280Tn whilst debt is $250Tn.

In which case, as you can only buy a sampled version, over that of buying a equal proportionate share, the cap weighted portfolio should be of the order of a 90% mortgaged home and stocks of value 32% of that house value. £280K home value, £90K in stocks, £250K mortgage.

Which is pretty high leverage, £120K capital, £370K asset value, over 3x leverage factor.

Rebalancing to that ... and anyone know where a retiree might secure a £9M mortgage and/or where a £10M property might be up for sale? :D


Try rebalancing it to

"It isn't common to see claims you should hold ... "

1nvest
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Re: Cap weighting

#463856

Postby 1nvest » December 7th, 2021, 1:28 pm

Bogleheads for one advocate cap weighted exposure. And academics indicate it as the cheapest way to own the stock market (buy the market in its weightings at the time and any drift sees your holdings drift by the same amount so no rebalancing required, you still hold the market in its cap weighted proportions).

Eugene Fama : "Your money is like soap. The more you handle it, the less you have."

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Re: Cap weighting

#463864

Postby dealtn » December 7th, 2021, 1:45 pm

1nvest wrote:Bogleheads for one advocate cap weighted exposure. And academics indicate it as the cheapest way to own the stock market (buy the market in its weightings at the time and any drift sees your holdings drift by the same amount so no rebalancing required, you still hold the market in its cap weighted proportions).



Which isn't the same as your leveraged position of a mortgage in the OP. Difficult to have it both ways.

BT63
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Re: Cap weighting

#463893

Postby BT63 » December 7th, 2021, 3:18 pm

I thought the studies I have seen in the past showed that equal weighted portfolios tended to outperform capitalisation weighted portfolios.

And if we cap-weight everything we could invest in, our portfolios should also hold bonds, precious metals, cryptocurrencies, antiques, art and more.


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