The Investment Scientist

Small Cap Value and Emerging Markets Roar Back with a Vengeance

Posted on: February 8, 2012

Last year, while the S&P 500 was largely flat, small cap value and emerging markets were down significantly. No wonder some clients of mine got a bit edgy.

What a change one month has made! As of Feb. 5, these two asset classes have roared back with a vengeance. See the table below.

2012 Year to Feb 5th 2011
DFA US Small Cap Value 12.74% -9.74%
DFA Emerging Mkts Value 19.44% -26.50%
DFA Intl Small Cap Value 12.74% -19.41%

The lesson here: when we see big losses like -19%, -26%, we can view them as a financial Armageddon or as a buying opportunity. The latter position is mentally much harder to take, but it almost always pays off. 

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

4 Responses to "Small Cap Value and Emerging Markets Roar Back with a Vengeance"

By “buying opportunity”, you mean: really big dip, then re-balance to buy low; really big surge, then re-balance to sell high. Right?

Yes Jerry. The keyword here is rebalance.

You didn’t explicitly mention the term, but I thought that’s what you meant. (You have to be very clear, type s-l-o-w-l-y, and use small words for some of us non-financial types. *grin*)
Yeah, re-balancing hurt. It was hard to explain to my wife why I wanted to move her money from “safe” cash and bonds into stocks when stocks were doing so poorly. She’s much happier now. I’m not quite at the point of selling high to re-balance again, but I think that conversation will be much easier.


I recommend a buy Jason Zweig’s book “Our money, our brains” for your wife. The book explains very well why we are stricken by fear unnecessarily when markets fall.

It turns out there is a small part of our brain called amygdala that constantly scans for danger. It works under our consciousness. When it senses danger, it seizes the whole brain function, sucking energy away from other parts of the brain. It sends the body into two responses: fight or flight.

Amygdala was very useful in prehistorical time when our ancestors faced predatory animals all the time. But it really could hurt our financial well-being if we let it hijack our brains without check.

Part of the reason to have a well-written plan and always refer to the plan is to prevent amygdala hijack.


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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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