Is the Small Cap Premium a Myth?
 

Re: Is the Small Cap Premium a Myth?
 

This is something I was wondering as well. If small/mid caps do outperform large caps in the long run, then that would imply that S&P 500 < Wilshire 5000 < Wilshire 4500, no? In this case, I would prefer to be putting my money in Wilshire 4500 index funds rather than Wilshire 5000, even with the extra variance inherent in small caps.

Re: Is the Small Cap Premium a Myth?
 

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]

Re: Is the Small Cap Premium a Myth?
 

Call me a fool but I have a majority of my Roth in a Russell 2000 fund and it has done very well. It went sideways to slightly up during corrections and performs almost as well as the large caps in run ups. It's about 80% of my Roth (QQQQ is the other 20%).

Re: Is the Small Cap Premium a Myth?
 

[ QUOTE ]
Call me a fool but I have a majority of my Roth in a Russell 2000 fund and it has done very well. It went sideways to slightly up during corrections and performs almost as well as the large caps in run ups. It's about 80% of my Roth (QQQQ is the other 20%).

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PA, I'd never call you a fool... [img]/images/graemlins/wink.gif[/img]

As long as you know/understand what you are doing, and it fits in your personal risk profile... then you're fine.

Re: Is the Small Cap Premium a Myth?
 

'James dispels what he calls an urban myth that small caps tend to outperform large caps. If you disentangle the size and value effects the difference goes away'

This is silly, the 'size effect' is the whole point of the outperformance, no?

I will vouch that the 'small-cap' effect should really be called the 'micro-cap' effect, as the majority of it resides in the smallest 10% of smallcaps. But as long as you're not an institution, that shouldn't affect you much.

Re: Is the Small Cap Premium a Myth?
 

I think the fama french studies provide good evidence of a small cap premium.

It is important to note that this premium exists over the long term. There have been long periods of time (I think around 10 years) where growth has outperformed value. In addition, small cap value has a higher standard deviation then large cap funds.

Realistically, it would be difficult for the average person to stay the coarse for such a long time and endure the effects of the high standard deviation.

That is why people diversify.

Re: Is the Small Cap Premium a Myth?
 

Intuitively, it makes sense to me. Large institutional investors have too much money to invest in small caps. This stable money probably keeps the large caps values more stable as well as limiting their returns since more people are chasing them.
Small caps, because they are small, also have more headroom to grow. Every once in a while, one of those little companies is going to blow up and become a large cap. Its a lot easier for a $500 million company to double in market cap, than it is for a $10 billion company.

Re: Is the Small Cap Premium a Myth?
 

[ QUOTE ]
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?

Re: Is the Small Cap Premium a Myth?
 

If this is the case you should invest in a small cap fund. Specifically a small cap value fund.

The main question is what percent of your US portfolio should you allocation to small cap value. This is primarily a function of your risk tolerance. It is also important to note that many people think they have higher risk tolerances than they actually do. One of the biggest mistakes you could make is having a portfolio that is too risky for you and selling out of positions during a bad down turn.

So why not invest all of your domestic holdings in Small Cap Value?
The small cap value premium is based on historical information. Know one knows what will happen in the future. While their is a high probability that small cap value will outperform over the long run, their is not absolute certainty.

Thus, the best idea is do diversify. Simply holding a total stock market index and a small cap value index is a very good idea.