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Rekenthaler Report

4 Reasons Not to Own the Market Portfolio

There are valid reasons to take a different approach.

A False Assumption
Friday's column pointed out that, contrary to common belief, investors aren't necessarily being theoretically correct if they index the entire stock market. As Dr. Harry Markowitz pointed out, some years back, the postulate that rational investors should own all equities, in proportion to their stock-market worth, relies on the assumption that stock owners will routinely leverage at the risk-free rate. As that is not the case, the theory collapses. There may be valid grounds to own something other than the market portfolio.

(Of course, most investors, behaving as butterfly collectors rather than as engineers, own something other than the market portfolio. But those differences owe to accidental decisions. This column, instead, concerns the intentional reasons that one might digress from orthodoxy.)