Does the small cap asset class make up a sufficient portion of your stock portfolio?  If not, you may be missing out on a crucial segment of the market, as highlighted in the Wall Street Journal article “Small Caps Loom Large.” While many financial commentators refer to the past ten years as the “lost decade”, they are doing so based on the lackluster performance of popular benchmarks such as the S&P 500 Index or Dow Industrial Average.  During that same decade, the small cap asset class performed much better.

While Wall Street’s biggest stocks have lost ground since the decade that began Jan. 1, 2000, small-capitalization stocks have soared. The Standard & Poor’s 600, a small-stock index, gained nearly 100% during the period, producing an annualized return of 7.1%. The large-cap S&P 500, by comparison, fell nearly 18%, representing a loss of almost 2% a year. — WSJ Article

It is commonly understood that throughout a market cycle, there are times when growth stocks outperform value stocks, and there are also times when value stocks outperform growth stocks. The same observation holds for capitalization, where small cap will outperform large cap during some periods, and large cap will outperform small cap during other periods.  The following chart displays how equity rotation has affected asset class performance over the last ten years.

So far in 2010 Small Caps have been leading the way, but as you can see in the chart, trends don’t last forever.  This further reinforces our belief in having a strategically allocated portfolio.

Tags: Equity Rotation, Small Cap, Strategic Asset Allocation