|The Big Story Behind Small Stocks
By: Mary E. Brunson | Feb 11, 2011
Why do people pick stocks or try to spot the next hot sector? Likely, it’s because they are drawn in by captivating headlines of magazines and newspapers designed to sell subscriptions instead of developing a keen understanding of long-term historical data.
Here’s a quick and valuable tidbit that will prevent you from ever again dropping five bucks and change on a magazine touting hot stocks or sizzling sectors:
More often than not, small-cap value tilted portfolios outperform large-cap growth oriented portfolios. In fact, when we look at monthly rolling 12-month periods for the last 83 years, we see that IFA U.S. Small Cap Value Index beats IFA U.S. Large Growth Index 59% of the time. And, small-value beats large growth in greater percentages of the time in longer time periods such as 3, 5, 10 and 20 years, as seen in the chart below.
Last year proved to be no exception as small cap stocks outperformed large cap stocks by a significant margin in most global markets. But, stock pickers and asset class speculators had to ignore the headlines that claimed the ability to forecast the best-performing asset classes, and instead stay the course to realize the ultimate small-cap premium that came, left and then roared back.
Specifically, US small stocks started off strong in 2010 with the IFA US Small Cap Index quick out of the gate with a gain of 17.50% in the first 4 months, more than double the return of the S&P 500 Index for the same time period. That small cap premium faded, however, and by Labor Day both large cap and small cap indices were down for the year. A surprisingly strong rally during the remainder of the year drove the IFA US Small Cap Index up 32.43%, and for the year as a whole it was the best performance for US small stocks since 2003.
Small caps’ mighty roar was not predicted by leading financial pundits. Here’s a short list of some major financial media misfires for 2010:
- In November 2009, the Wall Street Journal 1 claimed “small caps aren’t looking that cheap anymore” and suggested that the stock market rally was in the midst of “an important change that has put the less-volatile large caps back in favor.”
- Money’s 2010 2 Investor’s Guide said that smaller stocks’ rally had been played out, and as the bull market appeared to be maturing, it was time to switch gears and “bring your focus back to high quality blue-chip stocks this year.”
- Smart Money 3 predicted the U.S. would remain mired in recession and pitched for large multinationals such as Procter & Gamble and Coca-Cola that “sell goods worldwide and don’t need an economic rebound to make money.”
- Fortune’s 2010 4 Investor’s Guide issue repeated the refrain that an uneven economic recovery would reward clever stock-pickers: “Making judicious stock selections will be crucial in what is likely to be a topsy-turvy year.” It was indeed a topsy-turvy year for the markets, but even more so for Fortune’s ten stock picks that delivered an average price-only return of just 1.75%.
Long term stock market history provides our clearest path for investment success, and large sets of historic risk and return data are the best. At IFA, 83 years of history enables us to help our clients take the guesswork out of investing — focusing on science, not speculation. We don’t guess about what might happen in the short-term, but instead we rely on the simple fact that stocks have a positive expected return over time, and the degree to which you can invest your stock assets in small and value stocks, you have the highest probability of long-term investment success. And, investment success is what every investor wants.
1 Donna Kardos Yesalavich. “Large-Cap Stocks Are Back in Favor” Wall Street Journal November 12, 2009.
2 Pat Dorsey. “What’s Ahead for Stocks” Money January/February 2010
3 Reshma Kapadia and Russell Pearlman. “Where to Invest 2010” SmartMoney January 2010
4 Katie Benner, Scott Cendrowski, and Mina Kimes. “The Best Stocks in 2010” Fortune December 21, 2009
It is IFA’s privilege to share this information with you. Each of our investment professionals welcomes the opportunity to assist you in your quest for risk-appropriate, low-cost returns. To learn more, please call 888-643-3133 or visit ifa.com.
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