Other forms of Equity

There is a lot of literature that describes pension funds as a fixed income investment. And people generally know that investing in their own company is risky since it lacks diversification. Then why do bankers invest so much in equities?

It seems that a banker's bonus is heavily tied to the equity markets. When the markets are doing well, they get a big bonus; when they are doing poorly they get a small bonus and perhaps even get fired.

If you look at the first year VP as an example. This person is probably worth ~$1mm and their bonus in a good year can vary from anywhere as low as $300K to as much as $500K. That is a $200K difference (or 20% of the individual's net worth) that is heaving correlated with the equity markets.

If the difference between a good market and a bad market is 20% (say +/- 10%) - then, it would seem that this investor already has $1mm invested in equities by being a banker. As he thinks about asset allocation, it would seem that he should assume that 50% of his portfolio is already invested in equities.

A similar argument can be made for other groups whose income is heavily correlated with the market (university endowments, CEOs, etc)