If it makes good sense to invest in value stocks (it does), and if it makes good sense to invest in small-cap stocks (it does), why not combine the two and invest in small-cap value stocks?
Based on 87 years of performance data, it’s a sound strategy.
In fact, small-cap value stocks have (in the long run) far outperformed large-cap blend stocks, large-cap value stocks and small-cap blend stocks.
In the long run, small-cap value is the undisputed champion of these four major asset classes. But the operative phrase there is “in the long run.” Over shorter time periods, small-cap value stocks can be disappointing.
Some numbers: From 1928 through 2014, U.S. small-cap value stocks turned in a compound annual return of 13.6% (compared with 9.8% for the Standard & Poor’s 500 Index SPX, +1.26% ).
At 13.6%, an investment of $100 would have grown to more than $6.5 million over those 87 years (compared with slightly less than $350,000 for the S&P 500).
In its best year, 1933, the small-cap value index was up 125.2%. (Pretty amazing for the middle of the Great Depression.) But only two years earlier, this asset class suffered a loss of 54.7%. I imagine that was bad enough to discourage all but the hardiest of investors.
So it’s a safe bet that a lot of people who understood the theoretical merits of small-cap value investing had their money (what was left of it) somewhere else in 1933. Too bad.
Those were the extreme years. In 59 out of the 87 years for which this data is available, small-cap value stocks had positive returns, with an average calendar-year gain of 34.6%.
That is very sweet music by any standards. There was a downside, of course: 28 losing years, with the losses averaging 16.6%.