Small-company stocks have historically earned returns at least equal to, if not better than, those of large-company stocks. This “small-company effect” was first quantified in a 1981 study, and while much research on both sides of the issue has since been done, most investing professionals agree that it makes good sense to invest at least a portion of a portfolio in the stocks of smaller companies.
SMI has normally owned equal (or at least similar) allocations of small- and large-company stocks in our Just-the-Basics (JtB) and Fund Upgrading portfolios. This stands in contrast to the market-weighted stock market indexes, such as the S&P 500 and Wilshire 5000, that place greater weight on the shares of larger companies. The net effect, then, is that smaller-company stocks are overweighted in SMI’s portfolios in relation to the market indexes.
While the tendency of small-company stocks to outperform has likely provided a boost to SMI’s overall long-term performance, the year-to-year impact can be uneven. The market can swing from favoring one type to the other, often with little explanation. We can see this in our returns over the past couple of decades.
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