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Stop Trying To Beat The Averages

"At any given time, only half of us are better than average."

When we allocate our portfolios, our success as managers is measured by whether we are able to beat the "Market". Usually, the "Market" is defined as the S&P 500, the index of 500 large U.S. companies. The methodology of the S&P 500 defines these companies as having a market cap of at least $5.3 billion, are profitable, and are fiscally viable. I often ask myself whether that is fair, or even necessary. I contend that it is neither

First, and foremost, the S&P 500 is not a representative sample of the U.S. stock market; not even close. When one runs the numbers (I used Zacks' stock screener to find the data, 2/5/2015), some simple facts come to light. The average market cap for the S&P 500 is either $38,113M (mean, σ = $21,290M) or $18,905M (median, IQR =… Read More …