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, July 16, 2018. You can also find the re-balance calendar for 2017 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 Cap Stocks For The Long Term

Small capitalization stocks are loved by long term buy and hold investors. On the other hand, they are also subject to more speculation. In this newsletter, we want to look at these stocks in more details. 

Recent strength

Of course, the increasing interests from investors (we have received many emails on small cap stocks) recently are mostly from the recent strength in small cap stocks: 

US Equity Style Trend as of 6/29/2018

Description Symbol 4 Weeks  13 Weeks 26 Weeks 52 Weeks Trend Score
Russell Smallcap Growth IWO -0.21% 7.22% 9.62% 21.98% 7.17%
Russell Largecap Growth IWF -0.27% 5.67% 7.08% 22.29% 6.62%
Russell Smallcap Index IWM -0.04% 7.86% 7.67% 17.72% 6.16%
Russell Smallcap Value IWN -0.17% 8.24% 5.26% 13.02% 4.84%
Russell Midcap Growth IWP -0.84% 3.07% 5.28% 18.29% 4.68%
Russell Largecap Index IWB -0.41% 3.49% 2.71% 14.35% 3.77%
Russell Midcap Indedx IWR -0.18% 2.76% 2.27% 12.22% 3.1%
Russell Midcap Value IWS 0.18% 2.38% -0.31% 7.4% 1.73%
Russell Largecap Value IWD -0.5% 1.18% -1.82% 6.63% 0.92%

Even though stocks were volatile and exhibited some weakness recently, small cap growth stocks are in the strongest up trend among all styles of stocks while other small cap stocks are stronger than the rest except for large cap growth. 

Small cap stocks had started to outperform large stocks since late last year and earlier this year. Before that, there mostly lagged behind large stocks. 

Long term performance

Small cap stocks represent businesses that have their market capitalization less than $2 billion dollar. Many of these companies eventually grow out of its small cap category and become mid cap or even large cap stocks. On the other hand, some of them could do badly and are eventually eliminated (delisted, for example or become a micro cap less than $300 millions market cap) from this category. The small cap selection criteria such as the one from Russell 2000 index act like a filter and delete ‘bad’ ones annually from the index. On the other hand, the selection strategy will let ‘good’ companies take more weights in its index as their market capitalization grows. In this sense, the market cap weighted indexing is really a kind of momentum strategies. 

Because the growth potential of these smaller companies is usually higher than larger companies, these companies have traditionally outperformed large stocks: 

Small cap stocks vs. large cap stocks (as of 6/29/2018):
Fund 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR 20Yr AR 25Yr AR 30Yr AR 35Yr AR
NAESX (Vanguard Small Cap Index Inv) 16.9% 10.6% 12.3% 11.0% 11.3% 8.7% 10.4% 9.7% 6.5%
VFINX (Vanguard 500 Index Investor) 14.4% 11.9% 13.3% 10.1% 9.2% 6.3% 9.5% 10.3% 10.2%

The above table compares the total returns of Vanguard small cap index NAESX and Vanguard S&P 500 large company index.

The following compares small blend stocks, NAESX and VFINX total return, courtesy of Morningstar since 1983, a 35 year period: 

From the above, we can see that small cap stocks have indeed outperformed for the last 10, 15, 20 and 25 years. But they underperformed for the last 30 and 35 years. In fact, small cap stocks did badly in 1980s: lost every year from 1984 to 1990 except in 1988.

NAESX lost money many years in 1980s

If one started the investing clock from 6/29/1983 and looked at 20 years and 25 years later, here are the data comparison

From 6/29/1983 onward, small cap did badly in the 25 year time frame
Fund 10Yr AR 15Yr AR 20Yr AR 25Yr AR
NAESX (Vanguard Small Cap Index Inv)  -3.7% 0.8% 0.1% 2.3%
VFINX (Vanguard 500 Index Investor)  11.8% 15.4% 10.9% 10.2%

So NAESX did extremely poorly since 1983 for the following 10, 15 or even as long as 20 or 25 years! This is a surprise as numerous studies have pointed out that small stocks have done better than large stocks for a much longer period of time. For example, here are the data provided by Dimensional Fund Advisors. 

Asset Class:










S&P 500  Index










Large-Cap Value 




















Small-Cap Value  










The above data are from 1930 to 2013, an 83 year history. Apparently, small cap stock have done way much better, a 3% annual difference. 


Intuitively, small cap stocks should outperform in a long term as they possess higher growth potential. However, the above data also tell us that the outperformance can need a long time to show, longer than 20 years, the minimum holding time period we at MyPlanIQ normally would require strategic asset allocation or buy and hold strategies to have. In fact, it’s so much longer than 20 years if an investor happened to start his/her investments in 1983! 

What we can learn from the above is that

  1. One shouldn’t blindly accept the claim that ‘small cap stocks are always better for a long term’. Just like a buy and hold strategy, it all depends on the definition of the ‘long term’. In this case, we were hoping the long term is somewhat similar to our minimum buy and hold time period, i.e. 20 years. Unfortunately, that’s not the case here. It’s more like to invest for over 40 years or longer to see the outperformance benefit. 
  2. For a long term strategic or buy and hold strategy, a more balanced way to get small stock benefits is to invest in both large and small cap stocks. Though there is a 1983 case when small stocks underperformed badly, odds are still high that small stocks can outperform large stocks for a period longer than 10 or 15 years. 

Market Overview

Stocks continued to show their fatigue and weakness last week. High yield bonds, international stocks, emerging market stocks all exhibited negative trend. As the US trade policy is going into effect this week and other countries will respond with their own tariffs, economy and financial markets will surely be negatively affected in the near term. Furthermore, large multi-national companies (like most in the S&P 500 index or Dow Jones Industrial Index) will see more uncertainty in their business. This, together with the current unfavorite seasonality, high valuation in both stocks and bonds and over extended markets, is increasingly likely to cause a market correction. 

As always, we call for staying the course. 

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

Now that the Trump administration has been in the office for more than a year, the economy and financial markets are in general still in a good shape. Whether the economy will continue to benefit from the supposedly trickle down of the tax cut, the deregulation, and the promised infrastructure spending remains to be seen.  On the other hand, stocks continued to ascend, regardless of the progress. Looking ahead, however, we remain convinced that markets will experience more volatilities at some point when reality finally sets in. 

In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

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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