Hello, Russell 2000

I heard an interview with Paul Merriman a few days ago, and it reminded me of the work he and his team has done analyzing the perfect “all weather portfolio” mix.

The idea is that investing in the S&P 500 is nice. But you can do things to beat that without increasing risk (or even reducing risk too).

I’ve always been attracted to this idea, but I’ll admit I haven’t really followed the advice. Until today.

Paul shows that you can expect around 10.4% return on investment (over 50 years) if you simply invest in the S&P 500. And that’s pretty good.

But if you had invested in the US Small Cap Value index instead, you would have earned 13.6% return over that same time period with a bit more standard deviation (risk).

That 3.2% difference can be worth millions of dollars to a person over their lifetime. A $10,000 investment in the S&P would grow to $1.89 million in 50 years. But that same investment in small cap value would be $8.65 million. That’s almost a $7 million difference, or 4.5X as much!

And this is all based on the historical data. Obviously, you can’t predict future returns. But there is a reason why small cap value outperforms large cap, and that reason is unlikely to change.

Now if you’re not willing to bet it all on small cap stocks, you can diversify into some international stocks. Hold on to some S&P 500, get some large cap international, some small cap stocks, and a blend of small caps and large caps. Those 4 funds return $3.92 million over the 50 years which is still double what the S&P 500 alone would.

Remembering this research, I decided to buy some Russell 2000 today. I took some cash I had (from selling some stuff) and pushed into small caps.

I look forward to watching that over the years. About time!