Question.
Historically, the average return on US small stocks (bottom 10%) has been almost 20% per year, as opposed to the value-weighted return of the whole market, which is about 12% per year.
Logically enough, the standard deviation of the former is twice that of the latter, but on a long-term scale (20+ years) that shouldn't matter.
Pic related.
Why doesn't everyone invest in small stocks? Are there index funds specifically for these kind of stocks. What am I missing?
I'm pretty sure that graph is ignoring the comapnies that went bankrupt at some point after 1926.
>>1105425
I don't think so. That's from a university course, not from some random website. Why would they ignore bankruptcies?
Btw, the numbers I gave are arithmetic averages, geometric averages differ by less because of the greater volatility in small stocks. The difference there is 12.8% vs 9.9% which is still a lot.
>>1105425
Survival bias. It's quite difficult to track failed companies the earlier you get. You have several competing stock exchanges then, especially for the small companies who often weren't listed on the big exchanges, and the data isn't as reliable.
Having said that, I am a small cap investor and I believe with a common sense approach, ruling out risky companies and focussing on ones with excellent - not just great but exellent - fundamentals, you can do pretty well.
Small caps are more likely to be valued cheaply by the market. Or more. It's just more inefficient in valuing small companies, so you always see gems come and go.
>>1105471
>Having said that, I am a small cap investor and I believe with a common sense approach, ruling out risky companies and focussing on ones with excellent - not just great but exellent - fundamentals, you can do pretty well.
How long have you been at it? How well have you done, if you don't mind sharing?
I am trying to decided whether the difference between small cap investing and a classic index-heavy portfolio is worth the extra risk and time allocation.
bampin'
>>1105420 (OP)
>Logically enough, the standard deviation of the former is twice that of the latter, but on a long-term scale (20+ years) that shouldn't matter.
You're absolutely correct, although you should only be focused on small-cap value stocks (the trends don't hold up for small-cap growth stocks). Indeed, this is probably the most exciting area of research for financial academics and scholars since the advent of indexing itself. Those of us who follow the science regarding indexing are keeping a close eye on this.
http://www.bankrate.com/finance/investing/small-cap-value-stocks-1.aspx
However, more research is needed before we're ready to throw out the standard portfolio models. Small-cap value stocks have greater volatility than the broader market, and generally lower dividend returns too. It's important to fully understand what that means both in a Monte Carlo simulation and in real-world experiences. That's the research underway now.
Even today, a growing number of indexers are sufficiently convinced that we recommend strategic over-weighting to the small-cap value sector. Instead of the normal 5-10% that you'd put into small-caps, you might consider 15-20% (if and only if you have a truly long-term investment horizon, of course).
>Are there index funds specifically for these kind of stocks.
Yes, of course. For example:
https://personal.vanguard.com/us/funds/snapshot?FundId=0937&FundIntExt=INT
>>1105471
Not to burst your bubble, but what you're doing is just stock-picking cheap equities and speculating on price movement. There's no evidence your approach works any better than any other gambling strategy.
I don't want to turn this thread into a whole indexing vs. stock picking debate, but its important to understand that you can take a potentially good idea (small-cap value stocks) and ruin it by implementing it the wrong way (trying to pick winners).
>>1106079
Thanks, bro. I'll be sure to keep an eye on this as I prepare to start investing more seriously.
>>1105420
you realize the implied risk with a 20% return?
finance 101: high risk/high reward
12% return is nuts dude.
>>1106079
Small cap indexes don't do better than complete coverage
>>1106500
Why bother making a comment that is provably false?
I don't understand this board sometimes.
>>1106508
Because posters on /biz/ are made up of only slightly more knowledgeable people than the rest of the population. Ie still a bunch of retards.
Anyway, what do you do now that you're retired? I've been curious about that. Sports cars? Cruises? Banging hot instagram sluts?
