Large Stocks vs Small Stocks: Does the Last 3 Years Change Things?

Looking back at the last few years, small stocks have been under performing by a big margin compared to large stocks.   Is this just a short term fad or is this a bandwagon that you need to jump on?

The S&P 500 is a grouping of the 500 largest companies in America.  It is a very popular thing to invest in for many reasons.  First of all, it is made up of incredible companies that we all know and love like Google, Walmart and Apple.

Here is a chart showing 2017-2019 average annual returns from these different US stock categories.

 US Markets Annualized Return (%)
S&P 500 Index 15.27%
Dimensional US Large Cap Value Index 8.46%
Dimensional US Micro Cap Index 6.85%
Dimensional US Small Cap Index 6.75%
Dimensional US Small Cap Value Index 3.32%

Obviously the S&P 500 has done amazing, while the other categories have done below their long term averages.     This can sometimes lead to a problem called recency bias.   Recency bias is a form of timing the market and investing in what has done well recently.   We believe it can be detrimental to your long term investment strategy.

Different categories of stocks have returns that come at different times and for different reasons.   Our main job as investment coaches is to keep you diversified and disciplined during crazy times like this.   This has happened before, and it looked almost the same as it does in the chart above.

From 1995-March of 2000, the S&P 500 was the best category of stocks by a wide margin.  The next closest category was over 4% lower annually, with most of the other categories being 14% or more lower annually vs the S&P 500 during that time.     Then for the next 10 years starting in march of 2000, the S&P 500 was the only stock category that had a negative return.   Yes, it lost money over a 10 year period.  But International Small Value stocks were up over 14% per year during that same period and US Small Value stocks were up  over 11% per year.

The stock market is random and unpredictable in the short term.  It really does take patience to be a successful long term investor.  I know, just like you, how frustrating it is to see other people having great returns while I am not.

Below is a chart showing a longer term history, and the returns of each category, including international categories from march of 2000-through the end of 2019.

Markets Annualized Return (%)
Fama/French US Small Value Research Index 10.75%
Dimensional International Small Cap Value Index 10.51%
CRSP Deciles 9-10 Index 8.81%
Dimensional International Small Cap Index 8.79%
CRSP Deciles 6-10 Index 8.32%
Fama/French International Value Index 7.53%
MSCI Emerging Markets Index (gross div.) 6.99%
Fama/French US Large Value Research Index 6.76%
Dimensional International Large Value Index 6.14%
S&P 500 Index 6.01%
MSCI EAFE Index (net div.) 3.36%

You can see that the S&P 500 has been the second lowest category over this last 20 year period.

We keep our clients invested in the S&P 500, but we overweight towards small and value, because their long term returns have been higher.

Although the S&P 500 is popular, and has been up lately, that doesn’t mean you can forget the long term projections and academic studies that have proved again and again that an efficient diversified portfolio beats the S&P 500 in the long term.

By Jimmy Hancock

References

  1.  Matson Money. Three warning signs you may be speculating and gambling with your money powerpoint. N.p.: Matson Money Inc., 29 June 2020. PPT.

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