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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.