I read an article today on CNN Money titled, “The Case for Buying Small Cap Stocks” where the author, tells the reader why not to buy small cap stocks and then in the very same article tells you why you should invest in small cap stocks. It kind of annoyed me for two reasons:
- They took both sides without really refuting the negatives. As such “The Case” wasn’t that persuasive at all. and
- She talks about chasing a sector without really providing information how it should work in your total asset allocation.
Ignoring what could be just me being cranky for a second, it reminded me of a really cool chart that pops up in my office every couple months.
The Periodic Table of Investments
There are a bunch of versions of the table, I received this one from Callan Associates. Callan defines the table as a,
comprehensive representation of relative asset class performance over the last 20 years. The table depicts annual returns for eight asset classes, ranked from best to worst. Each asset class is color-coded for easy tracking. Well-known, industry-standard market indexes are used as proxies for each asset class.
It may be easier to click the picture to zoom in. Basically it shows different asset classes (as defined by indices) and their return for that particular year as compared to its counter parts. Since the article is discussing small caps I am going to highlight what the Russell 2000 has done for the past 20 years. Just for those that do not follow this kind of stuff the Russell 2000 is,
The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.
Bumpy ride much? So while I understand proper asset allocation, so you are exposed to that sector if you have one of those great years, I don’t get chasing the next big sector.
Sector Investing vs. Individual Stocks
Investing (or gambling depending on the amount of research you perform) with individual stocks seems to make sense to me because you at least can research each pick fully. If you are investing in a sector your research is not of individual companies but economic reasons why that particular sector should, as a whole, increase. It seems like a much more daunting task.
Do you chase sectors? Just individual stocks? None of the above?