Great Artilce About the Lagging Performance of Large Cap Stocks in This Week's Issue of BusinessWeek

BusinessWeek has a great article entitled "Blue Chip Blues" about the lagging performance of large cap stocks relative to their small cap and international peers. The author discussed why large cap stocks have performed so poorly this decade and why their underperformance might continue on into the future.

I found this article to be interesting. I personally have a very difficult time believing that large cap stocks are no longer worthy of my investment dollars. Investing styles tend to be very cyclical. Large cap stocks are not currently viewed as favorably as small cap or mid-cap stocks. However, during the mid-late 90s the exact opposite was true. I believe that the tide will eventually turn and large caps will start to outperform again. Over the long, long run (e.g., a 20-30 time frame), I believe small cap stocks will outperform. However, over a 5- or 10-year time frame, I do believe that it is possible for large cap stocks to generate better returns than small caps. I guess we'll all have to wait and see what happens.

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).