Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, March 28, 2016. You can also find the re-balance calendar for 2015 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Small And Large Company Stock Performance In Different Economic Expansion Cycles

US small and large company stocks are important in portfolio construction. Traditionally, small cap (company) stocks have out performed large cap stocks in the long term. However, these two categories of stocks can diverse dramatically for several years. Their divergence usually signals various economic expansion cycles. 

Long term small cap stock performance

We compare Vanguard small cap index fund (NAESX) with Vanguard large cap S&P 500 index fund (VFINX): 

Small vs. Large stocks (as of 3/21/2016):

Index Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 1/18/91
VFINX (Vanguard 500 Index Investor) 0.3% -0.9% 11.7% 12.0% 6.7% 9.6%
NAESX (Vanguard Small Cap Index Inv) -0.4% -9.5% 8.0% 9.8% 6.8% 11.3%

The date 1/18/91 is the first date our system has performance data for NAESX. 

For over 25 years since 1991, small cap stocks have outperformed large cap stocks by 1.7% annually. Intuitively, small companies have more growth potential in the long term and many of them eventually grow into large companies. Technology driven productivity gain and supportive monetary policies are the two key factors behind the long term growth of small companies. 

It thus makes sense to have some allocation in small company stocks for long term investments. 

However, small cap stocks have lagged behind large cap stocks recently. For example, from the above table, small stock index has under performed large cap stock index for the past 1, 3 and 5 years. Looking more closely, one can find small and large stocks have fared differently in two economic expansion cycles.

Early and late economic expansion cycles

If we look at the past two bull markets (and the current one), we can find the following performance: 

Index Name 5/1/11 – present AR 5/1/09 – 4/30/11 1/1/06- 1/1/08 4/1/03 – 12/31/05 1/1/96 – 1/1/2000 1/18/91 – 12/31/95
VFINX (Vanguard 500 Index Investor) 10.9% 27.2%  9.6% 16.4% 26% 16.4%
NAESX (Vanguard Small Cap Index Inv) 8.1% 38.2%%  7.4% 27.2% 15.2% 21.7%

The highlighted columns are for the early expansion cycles. 

One can see that for every early expansion cycle, small cap stocks outperformed large cap stocks. But when the expansion got into the late stage, large cap stocks bettered their small cap counterparts. Although there are no precise lengths for the early and late stage expansions, the trend and the difference are markedly visible. There is no exception in the above table. 

A possible explanation is that when economy is just out of a recession, small companies tend to benefit most and recover much faster than large companies. However, when the expansion is the late stage, markets are more and more dominated by large companies. Furthermore, even among large companies, earning growth is more concentrated in a handful of companies that have reaped great economic benefits from this whole expansion cycle. 

Currently, small cap stocks have been lagging for the past five years and going. In fact, among S&P 500 companies, earning growth is largely driven by big technology companies. The FANG (Facebook, Amazon, Netflix and Google) gang of four stocks are the latest internet phenomenon. Current expansion has gone on for seven years and it is longer than the average four year period, this expansion is no doubt in the late stage. It has certainly been shown by the divergence of small and large stock performance for the past several years. 

Tactical switch between large and small cap stocks annually

Though in the long term, small cap stocks have outperformed large stocks, for a period that can be as long as 5 years or longer (as in the latest example or from 1996 to 2000), small cap stocks can underperform. One would wonder whether there is a way to improve performance by rotating among the two indexes. The answer is yes. The following portfolio makes decision once a year at the end of a year to decide whether to invest in small or large cap stocks (NAESX or VFINX). It picks the fund with the higher momentum score to invest for a year and repeat the process again at the end of a year. 

Portfolio Performance Comparison (as of 3/21/2016):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 1/1/92
P Large and Small Cap Stocks Switch 0.4% -1.2% 10.4% 10.0% 6.8% 11%
VFINX (Vanguard 500 Index Investor) 0.4% -1.2% 11.6% 12.1% 6.7% 8.9%
NAESX (Vanguard Small Cap Index Inv) -0.4% -9.5% 8.0% 9.8% 6.8% 10%


  • Since 1992, the portfolio has outperformed both large and small cap stocks. 
  • However, for the past five years, it has still lagged behind VFINX, though not as much as NAESX has done. 
  • The portfolio switched to small cap stock from 2009 to the end of 2011 and then to large stock till the end of 2012, it then switched to small stocks again till the end of 2014. Since 2015, it has been in VFINX. See the portfolio’s historical holdings on the portfolio page for more details. 

The above shows that the performance divergence between the two asset classes is large enough to be even beneficial for once a year rotation. 

Market Overview

Stocks are showing positive momentum now. At a time like this, investors are often carried away by the current euphoria and fear to be left out. Based on our studies, however, the best way to make portfolio adjustment is to stick to a monthly pre-determined plan so that market trends can unfold and become more fully established. Even though financial markets are now more stable than a couple of weeks ago, we need to remember that fundamentals are still not rosy. For example, up to now earnings picture is not any better than before. Other than oil price recovery, all other concerns remain. 

For more detailed asset trend scores, please refer to 360° Market Overview

We would like to remind our readers that markets are more precarious now than other times in the last 6 years. Since the financial crisis in 2008-2009, we have not seen meaningful or substantial structural change in the U.S., European and emerging market economies. Even though U.S. stocks have had a recent correction, their valuation is still at a historical high level.  It is thus not a good time to take excessive risk. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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