Re: Is the Small Cap Premium a Myth?
 

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QQQQ is the other 20%.

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I think QQQQ is a fundamentally bad holding. It's an extremely growth-oriented large cap index--LCG on this chart:

<font class="small">Code:</font><hr /><pre>1972-2006

Correlations, CAGR, Volatility

Correlation to:.US Market...500 Index...EAFE/EM....CAGR...StDev
================================================== =============
US Market.........1.0000......0.9908.....0.5944...11. 24...17.46
500 Idx...........0.9908......1.0000.....0.5899...11.3 2...17.22
LCV...............0.9163......0.9054.....0.5535... 13.46...17.24
LCG...............0.9571......0.9680.....0.5309... 10.00...20.22
MCB...............0.9019......0.8618.....0.4946... 13.72...18.44
SCB...............0.8194......0.7460.....0.4595... 13.23...21.66
SCV...............0.7101......0.6410.....0.3585... 15.00...19.96
SCG...............0.8328......0.7663.....0.4751... 10.43...23.75
MicroCap..........0.6894......0.6043.....0.3756... 13.64...26.70
REIT..............0.5284......0.4638.....0.3041... 13.88...16.67
EAFE/EM...........0.5944......0.5899.....1.0000...12.07 ...22.08
LT Treas..........0.2584......0.2806.....0.0935....8. 47...11.37
IT Treas..........0.1878......0.2124....-0.0373....8.13....6.90
ST Treas..........0.1628......0.1845....-0.0920....7.12....4.06
T-Bills...........0.0323......0.0497....-0.1239....5.98....3.00
IT Bonds..........0.2724......0.2930....-0.0190....8.06....5.61
S-TIPS............0.1283......0.0942.....0.3974....7 .64....6.82
Commodities......-0.2466.....-0.2437....-0.1447....8.00...24.53
================================================== ============= </pre><hr />

CAGR=Compound Annual Growth Rate

After Commodities(which are only useful in small dose as a diversifier due to their negative correlation with equities) and Small Cap Growth(SCG), LCG has the worst risk/return ratio. Additionally, it has a high correlation to the total stock market, so it has no diversification benefit! If you go farther back to 1927 the trend holds.

Re: Is the Small Cap Premium a Myth?
 

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That's why you diversify... the different types of stocks whether it be small vs large or value vs growth, or foreign vs domestic, etc... each outperform at various times relative to the other... so unless you want to start guessing which is going to have the outperformance, or actually spending the time to make informed decisions... it is best to simply diversify across, so that you capture a piece of everything [img]/images/graemlins/smile.gif[/img]

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Sniper, bonds have outperformed stocks at certain times, but that doesn't imply that they outperform stocks in the long run. If my risk tolerance can handle small caps, and they outperform large caps in the long run, then wouldn't it make sense for me to invest in a small cap index fund?

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Daz, see the answer I gave to PA.

Things to consider:
1. Can you handle the drawdowns...
2. Can you handle the fact that past outperformance doesn't necessarily mean future outperformance.

In general, younger investors should answer yes, more often than older investors. Also, posters here who play poker should also be generally more likely to be able to handle the variance of a riskier investment strategy.

One of the most important things, is simply being able to pull a continuous flow of cash from income and put it into investments (almost any investments)... and over the years continually increase your investment knowledge and adjust your risk profile and investment strategies, as you go. The more you can funnel to investments and the earlier in life you start doing this, the better off you will be, later in life.