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How Long, a big rock hit in the seventies, opens with, “How long has this been going on?” A guy who suspects his lady is cheating on him declares “I’m not dumb.” I can’t say the same for myself, because I’ve been having a five-year affair with the wrong size stock and I’m not so sure I can take it anymore.
While the whole world has been piling into large cap stock funds, I’ve been nibbling at their purportedly undervalued small cap counterparts. I recently confessed having been caught dallying in international fare, so I’m no stranger to a mismatch.
I’ve just consulted the new issue of Barron’s to see how far I’ve sullied my reputation. Let’s see. The S&P 500 has gained almost 18% year-to-date, but the Russell 2000 small cap barometer is a hair below even. A strait-laced investor, I’m shocked at such behavior!
Turning to Morningstar, I learned that the outperformance of broad market index funds may be almost as much due to their size configuration as their technology overweight. Not surprisingly, the venerable and top-heavy S&P 500 index ETF (SPY) has no small caps. And the leading ostensibly “total market “ index ETF (VTI) relegates only 8% to them. A devoted value investor, I’m flirting with a 20% stake.
I’m done with how long this betrayal has been going on. Just tell me how long it will keep going on.
I too have a large, small cap exposure (about 16%). It makes me think of the saying that markets can remain irrational for longer than you can stay liquid.
I do believe that if we start to have a break in interest rates the market may shift more favorably toward small caps, but I know that I have zero ability to call markets so consider it hope.
You may be a better market pundit than you give yourself credit for! At the end of 2023 small caps had a nice run when it began to look like the Fed was done raising rates. Small companies are particularly dependent on consumer spending and debt financing. So we’ll see.
Steve, I can’t tell you how long it’s going to continue, but I’ll encourage you to persevere. Though that’s coming from someone with a mere 14-15% small cap stake.
Thanks for the support. I do plan to hold. Even 15-18% is nothing to sneeze at when the so-called “total market” index fund is stuck at 8%. Is that really the “correct” or “balanced” allocation to small caps? I sure don’t know and would be interested in getting enlightened by a reader who does.
Steve, I’ve admitted my knowledge of investing is suspect, but I’ll venture an opinion anyway. I’m exiting small caps, but slowly, which could either prolong the pain if they stay down, or give me a chance to second-guess myself if they rebound. Either way, I’m bound for a two or three fund portfolio within five years. Nice writing.
Thank you. You may not be as unsophisticated as you suspect. Reallocating in moderation is a rational way to go. I know what you mean about Monday morning quarterbacking. I’m one of those neurotic guys who actually make a watchlist of recent sells!
I feel your pain, Steve. I moved some money (maybe 40%) out of my high performing S&P 500 index funds several years ago and into small cap value and international. This was done based on themes I gleaned from a local financial advisor who I respect. His arguments may still be sound and based on “evidence”, but my portfolio return has indeed suffered somewhat from those changes. Still, I have no plans to “undo” the moves. I’m gonna keep letting it ride. Benign neglect from here on out.
Although I’m no fan of advisors, I think your guy was suggesting an allocation that many observers would say was sensible. Hopefully, for all off us wayward folks, we will get a nice reversion to the mean in both spheres. Not trading isn’t neglect—it’s an active choice to stay the course.