From Inside Personal Finance . I t's no secret. Here's what you should consider about different style index funds if you want to have them in your portfolio. My concern is that a lot of people don't know what they're bargaining for when they invest in such a fund, especially when they do it at the exclusion of all else. For example, there is a global market index, which is much more broadly diversified than the 500 biggest publicly traded companies.
Most indexes are capitalization weighted.
To put this in laymen's terms, let's say you have two companies you want to invest in. The alternative is to put more money into the company that is worth more. The bigger the company, the more of your money that goes into it. Most indexes are cap-weighted indexes, meaning the bigger the company, the more money that gets invested in it. That creates a very lop-sided investment portfolio, which really isn't diversified.