FYI: Last week my colleague Michael Batnick pointed out that small cap stocks have seen the equivalent of both a bear and bull market this year alone:
The people that use all-time highs to scare you are the same people who told you that the 27% selloff in the Russell 2000 earlier this year was the canary in the coalmine. Small-cap stocks are now at all-time highs and 40% off their February lows.
It seems like a distant memory now, but the S&P 500 was basically the only stock market that didn’t go into a bear market — as defined by a 20% or greater loss — during the early-2016 selloff.
Regards,
Ted
http://awealthofcommonsense.com/2016/11/the-agony-of-investing-in-small-cap-stocks/
Comments
Great stuff! Yet another insightful article from the fertile mind of Ben Carlson. The graph that compares the S&P 500 with the Russell 2000 drives the main point home with conviction.
No pain, no gain is applicable in the investment world. Small Caps have delivered higher historical returns than their big brothers for a reason. The high Small Cap volatility and failure rates signal the risk that is coupled to their excess returns.
There are always costs when squeezing that little extra out of the marketplace. Is the reward worth the incremental risk? Each investor's assessment is reflected in his portfolio construction.
In the design of a new product, the successful Lockheed-Martin leader Norn Augustine had a law. It seems as if he had a law for most everything. His law said that "the last 10% of performance generates one-third of the costs and two-thirds of the problems". It doesn't take much imagination to extend that bit of wisdom to investing.
If you are motivated, you might want to check Augustine's book that summarizes his numerous insights. The book was published in the 1980s, but is still relevant. It is titled, not surprisingly, "Augustine's Laws". It is a breezy read being full of interesting stories told in a very humorous way. I recommend it. Enjoy.
Best Wishes.