The Investment Scientist

Posts Tagged ‘small cap value

ImageIf you are a typical investor, given the choice between investing in a small cap value fund or a large cap growth fund, which one would you choose?

You would probably go with the large cap growth since “large cap” sounds a lot safer than “small cap,” and “growth” sounds a lot more promising than “value.”

To prove how wrong you are, I did a study of the relative performances of these two styles in the eight decades between 1931 and 2010. Here is what I found.

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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.


Author

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

Twitter: @mzhuang

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