Why would an investor want to use market-cap indices instead of other investment strategy-type indices?
Market-cap indices are representative of the market portfolio, the portfolio that encapsulates the risk and return forecasts, and hence the investment choices of all investors across the world. Although any market-cap index can only ever be a subset of the global market portfolio, they nevertheless provide a good representation of the choices of the ‘average’ investor. For investors who consider themselves to be ‘average’, the market portfolio and hence a market-cap index, should be the starting point for investment discussions. Investors who consider themselves to be different to the ‘average’ may have reason to deviate from market-cap indices. For example, some investors may have a requirement for short-term liquidity and are therefore fearful of exposure to illiquid assets and the securities of companies that may be at risk of bankruptcy. However, many of those investors who do consider themselves superior to the ‘average’ have learnt from experience that being consistently better i
