With investors and the media focusing so much on near term stock market conditions (especially with another Fed rate announcement due out today), I thought now would be a good time to take a step back and look at a longer term, big picture view of the market. So, I started slicing up stock data - starting with market cap.
Small Caps - Risk vs. Reward
What peaks my interest is the performance of small cap stocks over time. I had always assumed that investing in smaller stocks was too risky. However, while these stocks do carry higher volatility and higher risk (as measured by the standard deviation of returns) the trade-off may be worth it depending on a person’s risk profile. Why? Have a look at the chart at left (click to enlarge it). Over the last 5 years, small cap stocks as measured by the Russell 2000 index (RUT) have outperformed the broader market (RUA) by an annualized 2.5 percentage points per year (that’s significant!). So, is the risk / reward worth it? I’ll keep you posted - I want to make sure that I consider all of the facts first and share them with you - especially the risk metrics.