should the Market Capitalization be equal to the Equity of the firm
"Lots of questions: In general, no. Market Capitalization and Equity represent 2 different things.  Equity first, the equity of a firm is the value of the assets (what it owns) less its liabilities (what it owes) and consists (broadly) of two components - share capital (what the firm gets when it sells to investors as part of an IPO or subsequent share issue) and retained earnings (what the firm has as a result of making profits and not paying them out as dividends). This is the theoretical liquidation value of the firm - what it is worth if it stops trading, sells all its assets and pays all its debts. Market Capitalization is the current value of the future cash flow of the firm as perceived by the market - the value today of all the dividends that the firm will pay in the future for as long as it exists. This is the theoretical going concern value of the firm - what it is worth as a functioning business. In general, Market Capitalization is bigger than Equity - if it isn't the firm is worth more as scrap than as an operating business. Um ... no. If you don't have any shares then you are by definition not an owner. Having shares is what makes you an owner. What I think you mean is, is it possible for the owner(s) of a private company to sell all of its shares when it goes public? The answer is yes. It is uncommon for a start-up owner to do this but it is standard practice for ""corporate raiders"" who buy failing companies, take them private, restructure them and then take them public again - they have done their job and they are not interested in maintaining an ownership stake. Nope. See above and below. Not at all, equity is an accounting construct and market capitalization is about market sentiment. Consider the following hypothetical firm: It has $1m in equity, it makes $4m in profit and will do for the foreseeable future, it pays all of that $4m out as dividends - if we work on a simple ROI of 10% then this firm is worth $40m dollars - way more than its equity."
"Diversification is the only real free lunch in finance (reduction in risk without any reduction in expected returns), so clearly every good answer to your question will be ""yes.""  Diversification is good.""  Let's talk about many details your question solicits. Many funds are already pretty diversified.  If you buy a mutual fund, you are generally already getting a large portion of the gains from diversification.  There is a very large difference between the unnecessary risk in your portfolio if you only hold a couple of stocks and if you hold a mutual fund.  Should you be diversified across mutual funds as well?  It depends on what your funds are.  Many funds, such as target-date funds, are intended to be your sole investment.  If you have funds covering every major asset class, then there may not be any additional benefit to buying other funds. You probably could not have picked your ""favorite fund"" early on.  As humans, we have cognitive biases that make us think we knew things early on that we did not.  I'm sure at some point at the very beginning you had a positive feeling toward that fund.  Today you regret not acting on it and putting all your money there.  But the number of such feelings is very large and if you acted on all those, you would do a lot of crazy and harmful things.  You didn't know early on which fund would do well.  You could just as well have had a good feeling about a fund that subsequently did much worse than your diversified portfolio did. The advice you have had about your portfolio probably isn't based on sound finance theory.  You say you have always kept your investments in line with your age.  This implies that you believe the guidelines given you by your broker or financial advisor are based in finance theory.  Generally speaking, they are not.  They are rules of thumb that seemed good to someone but are not rigorously proven either in theory or empirics.  For example the notion that you should slowly shift your investments from speculative to conservative as you age is not based on sound finance theory.  It just seems good to the people who give advice on such things.  Nothing particularly wrong with it, I guess, but it's not remotely on par with the general concept of being well-diversified.  The latter is extremely well established and verified, both in theory and in practice.  Don't confuse the concept of diversification with the specific advice you have received from your advisor. A fund averaging very good returns is not an anomaly--at least going forward it will not be.  There are many thousand funds and a large distribution in their historical performance.  Just by random chance, some funds will have a truly outstanding track record.  Perhaps the manager really was skilled.  However, very careful empirical testing has shown the following: (1) You, me, and people whose profession it is to select outperforming mutual funds are unable to reliably detect which ones will outperform, except in hindsight  (2) A fund that has outperformed, even over a long horizon, is not more likely to outperform in the future. No one is stopping you from putting all your money in that fund. Depending on its investment objective, you may even have decent diversification if you do so.  However, please be aware that if you move your money based on historical outperformance, you will be acting on the same cognitive bias that makes gamblers believe they are on a ""hot streak"" and ""can't lose.""  They can, and so can you. ======== Edit to answer a more specific line of questions =========== One of your questions is whether it makes sense to buy a number of mutual funds as part of your diversification strategy.  This is a slightly more subtle question and I will indicate where there is uncertainty in my answer.   Diversifying across asset classes.  Most of the gains from diversification are available in a single fund.  There is a lot of idiosyncratic risk in one or two stocks and much less in a collection of hundreds of stocks, which is what any mutual fund will hold.  Still,you will probably want at least a couple of funds in your portfolio.  I will list them from most important to least and I will assume the bulk of your portfolio is in a total US equity fund (or S&P500-style fund) so that you are almost completely diversified already. Risky Bonds.  These are corporate, municipal, sovereign debt, and long-term treasury debt funds. There is almost certainly a good deal to be gained by having a portion of your portfolio in bonds, and normally a total market fund will not include bond exposure.  Bonds fund returns are closely related to interest rate and inflation changes.  They are also exposed to some market risk but it's more efficient to get that from equity.  The bond market is very large, so if you did market weights you would have more in bonds than in equity.  Normally people do not do this, though.  Instead you can get the exposure to interest rates by holding a lesser amount in longer-term bonds, rather than more in shorter-term bonds.  I don't believe in shifting your weights toward nor away from this type of bond (as opposed to equity) as you age so if you are getting that advice, know that it is not well-founded in theory.  Whatever your relative weight in risky bonds when you are young is should also be your weight when you are older. International. There are probably some gains from having some exposure to international markets, although these have decreased over time as economies have become more integrated.  If we followed market weights, you would actually put half your equity weight in an international fund.  Because international funds are taxed differently (gains are always taxed at the short-term capital gains rate) and because they have higher management fees, most people make only a small investment to international funds, if any at all. Emerging markets  International funds often ignore emerging markets in order to maintain liquidity and low fees.  You can get some exposure to these markets through emerging markets funds.  However, the value of public equity in emerging markets is small when compared with that of developed markets, so according to finance theory, your investment in them should be small as well.  That's a theoretical, not an empirical result. Emerging market funds charge high fees as well, so this one is kind of up to your taste.  I can't say whether it will work out in the future. Real estate.  You may want to get exposure to real estate by buying a real-estate fund (REIT).  Though, if you own a house you are already exposed to the real estate market, perhaps more than you want to be.  REITs often invest in commercial real estate, which is a little different from the residential market. Small Cap.  Although total market funds invest in all capitalization levels, the market is so skewed toward large firms that many total market funds don't have any significant small cap exposure.  It's common for individuals to hold a small cap fund to compensate for this, but it's not actually required by investment theory.  In principle, the most diversified portfolio should be market-cap weighted, so small cap should have negligible weight in your portfolio.  Many people hold small cap because historically it has outperformed large cap firms of equal risk, but this trend is uncertain.  Many researchers feel that the small cap ""premium"" may have been a short-term artifact in the data.  Given these facts and the fact that small-cap funds charge higher fees, it may make sense to pass on this asset class.  Depends on your opinion and beliefs. Value (or Growth) Funds.  Half the market can be classed as ""value"", while the other half is ""growth.""  Your total market fund should have equal representation in both so there is no diversification reason to buy a special value or growth fund.  Historically, value funds have outperformed over long horizons and many researchers think this will continue, but it's not exactly mandated by the theory.  If you choose to skew your portfolio by buying one of these, it should be a value fund. Sector funds.  There is, in general, no diversification reason to buy funds that invest in a particular sector.  If you are trying to hedge your income (like trying to avoid investing in the tech sector because you work in that sector) or your costs (buying energy because you buy use a disproportionate amount of energy) I could imagine you buying one of these funds. Risk-free bonds.  Funds specializing in short-term treasuries or short-term high-quality bonds of other types are basically a substitute for a savings account, CD, money market fund, or other cash equivalent.  Use as appropriate but there is little diversification here per se. In short, there is some value in diversifying across asset classes, and it is open to opinion how much you should do.  Less well-justified is diversifying across managers within the same asset class.  There's very little if any advantage to doing that." You need to be clear about who gets your money: If you pay the existing owner $25K and (s)he gives you half the business, then you now own half of a $50K business an the original owner has an extra $25K in spending cash.  The value of the business has not changed. If you contribute $25 to the company, new equity shares are created.  Shares should be priced correctly, meaning you now own $25K worth of shares in a company worth $75k, so you should have 1/3 of the outstanding shares (counting both old and new shares).  If you get more or less than this, then the transaction has happened in an unfair way. If this is a public company, that would most likely be illegal and the SEC may throw you in jail.  If it was a private company and your friend created enough shares that you own half the company, then (s)he has given you a gift. If you are contributing to the company at a fair price, you would need to contribute $50K in order to end up with half the equity of the new and now more valuable firm. In that case the firm would be worth $100K after your contribution. Bottom line, this is a common and not complex transaction and should end up with a completely fair outcome.  Any unfair situation you can imagine is probably based on false assumptions or a situation where a non-arms-length transaction is transferring wealth contrary to normal rules and procedures. Once your sister and you make your first payments, you've paid $20,645, and your sister has paid $1400. But your sister also owes rent. Zeroth order estimate for rent is that it's equal to mortgage payment, so that's $2045 (I assume that $2045 is actually your total payment, not just your escrow payment. Unless I'm misunderstanding what the term means, $2045 is an absurdly high amount for a monthly escrow payment.) So your sister now has made a net capital contribution of ... negative $645. So you're giving your sister a gift of $7740 each year, and are the sole equity owner of the house. There's a $14000/year gift tax exclusion, and I think that both you and your husband can claim it separately, so every year you could declare your sister to have $20260 added to her capital contribution, or more if you're willing to pay gift tax. But as it stands, if there are any losses from the property, they will be borne exclusively by you; therefore, any profits should be enjoyed exclusively by you. Any other arrangement is you giving a gift to your sister. If the price of the house were to shoot up to $1,000,000 after a year, and you were to split the profits with your sister 50:50, and not pay a gift tax, you WOULD be violating tax law. "For a two year time frame, a good insured savings account or a low-cost short-term government bond fund is most likely the way I would go. Depending on the specific amount, it may also be reasonable to look into directly buying government bonds. The reason for this is simply that in such a short time period, the stock market can be extremely volatile. Imagine if you had gone all in with the money on the stock market in, say, 2007, intending to withdraw the money after two years. Take a broad stock market index of your choice and see how much you'd have got back, and consider if you'd have felt comfortable sticking to your plan for the duration. Since you would likely be focused more on preservation of capital than returns during such a relatively short period, the risk of the stock market making a major (or even relatively minor) downturn in the interim would (should) be a bigger consideration than the possibility of a higher return. The ""return of capital, not return on capital"" rule. If the stock market falls by 10%, it must go up by 11% to break even. If it falls by 25%, it must go up by 33% to break even. If you are looking at a slightly longer time period, such as the example five years, then you might want to add some stocks to the mix for the possibility of a higher return. Still, however, since you have a specific goal in mind that is still reasonably close in time, I would likely keep a large fraction of the money in interest-bearing holdings (bank account, bonds, bond funds) rather than in the stock market. A good compromise may be medium-to-high-yield corporate bonds. It shouldn't be too difficult to find such bond funds that can return a few percentage points above risk-free interest, if you can live with the price volatility. Over time and as you get closer to actually needing the money, shift the holdings to lower-risk holdings to secure the capital amount. Yes, short-term government bonds tend to have dismal returns, particularly currently. (It's pretty much either that, or the country is just about bankrupt already, which means that the risk of default is quite high which is reflected in the interest premiums demanded by investors.) But the risk in most countries' short-term government bonds is also very much limited. And generally, when you are looking at using the money for a specific purpose within a defined (and relatively short) time frame, you want to reduce risk, even if that comes with the price tag of a slightly lower return. And, as always, never put all your eggs in one basket. A combination of government bonds from various countries may be appropriate, just as you should diversify between different stocks in a well-balanced portfolio. Make sure to check the limits on how much money is insured in a single account, for a single individual, in a single institution and for a household - you don't want to chase high interest bank accounts only to be burned by something like that if the institution goes bankrupt. Generally, the sooner you expect to need the money, the less risk you should take, even if that means a lower return on capital. And the risk progression (ignoring currency effects, which affects all of these equally) is roughly short-term government bonds, long-term government bonds or regular corporate bonds, high-yield corporate bonds, stock market large cap, stock market mid and low cap. Yes, there are exceptions, but that's a resonable rule of thumb." What about in the case of a company with unexpectedly low cash (and therefore an inability to easily pay out dividends) but with a surplus of inventory?  Obviously the investors should receive some premium for that, because I think anyone would prefer cash, but there are certainly extreme circumstances where it might be appropriate. Could be misunderstanding your context. But ev = equity + debt - cash. So don't think it makes sense for an equity holder to have an individual ev/ebitda different from the company's.   Are you asking in context of valuing equity and debt from an ev/ebitda multiple? "You can think of the situation as a kind of Nash equilibrium.  If ""the market"" values stock based on the value of the company, then from an individual point of view it makes sense to value stock the same way. As an illustration, imagine that stock prices were associated with the amount of precipitation at the company's location, rather than the assets of the company.  In this imaginary stock market, it would not benefit you to buy and sell stock according to the company's value.  Instead, you would profit most from buying and selling according to the weather, like everyone else.  (Whether this system — or the current one — would be stable in the long-term is another matter entirely.)" Here's the original academic backbone that it's based on and expanded upon.  https://en.m.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem  I think thats it's overly conservative in this case (I fully accept academic theories only go so far in the real world) as Damodaran (NYU professor) has made a pretty solid case that cash on balance sheet at large cap tech companies is valued by the markets at less than its after tax $ value.