Is the Small Cap Premium a Myth?

[Jeff W]

[ QUOTE ]
QQQQ is the other 20%.

[/ QUOTE ]

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.