Friday, December 30, 2005

Small Cap Value stocks outperform Large Cap Growth stocks

Small Cap Value stocks comprise one of the best (if not the best) performing types of stocks for the long haul. As you probably remember, between 1995 and 1999, Large Cap Growth stocks were all the rage and Small Cap Value stocks were shunned like an ugly step-sister. However, since 2000, Small Cap Value stocks have outperformed their Large Cap Growth peers by over 100%.

I performed a little bit of Internet research and discovered that between 1926 and 2004, Large cap Growth stocks had an average annual return of about 9.26%. Accordingly, $10,000 invested in Large Cap Growth stocks in 1926 would have grown to about $10 million by 2004. That's not too shabby. However, it pales in comparison to the astonishing 15.9% annual return of Small Cap Growth stocks over the same time period. $10,000 invested in Small Cap Value stocks in 1926 would have grown to about $1 billion by 2004!

Here's an illustration of these returns that was in the New York Times last year:

For those interested in investing in Small Cap Value stocks, I recommend the Vanguard Small Cap Value index fund (symbol: VISVX) or the corresponding Vanguard ETF (symbol: VBR).


Anonymous said...

Is there any reason to invest in small cap stocks if already invested in VTI? They have a correlation coefficient of around 0.98 so I don't see the point as a long-term investor.

Jim said...

^^^Anonymous, you could invest directly in VTI. However, small caps comprise a very small % of VTI. I don't know the actual makeup of VTI, although I suspect that small caps may only comprise maybe 3 or 4% of VTI. You should invest in a separate small cap index fund if you want to overweight small caps.