Historically, small-cap stocks have outperformed large-cap stocks. This difference is referred to in investment circles as the small-cap (aka small-company) premium. The discovery of the small-cap premium is credited to Rolf Banz’s 1981 Journal of Financial Economics study, “The Relationship Between Return and Market Value of Common Stocks.” I specifically bring Banz’s study up because there has been a debate as to whether the publication of his study effectively destroyed the premium.
Between 1927 and 1980, small-company stocks realized an annualized return of 17.1%. Over the same time period, large-company stocks gained 9.3% annually. Using the formula of small minus big results in a rounded premium of 7.7%. (I’m using data from Dartmouth professor Kenneth French’s website for the smallest and biggest 30% of companies to calculate the returns.)
During the subsequent period 1981-2016, small-company stocks realized an annualized return of 11.8% and large-company stocks have realized an annualized return of 11.7%. This is the argument for Banz’s study having ended the premium. These numbers do not tell the full story, however. Further analysis reveals a different picture. Continue Reading »
AAII Members Receive Tax Guidance
The AAII Journal’s annual tax guide helps investors stay up to date with the ever-changing tax regulations, includes last-minute reminders for 2016 and provides tax strategies for 2017.
It will help you understand your current tax liability and what you can do to potentially lower your tax bill this year and next year.
Start your AAII membership today to get The Individual Investor’s Guide to Personal Tax Planning 2016, and to benefit from everything AAII has to offer.
More on AAII.com
- How Much Small Cap Should Be in Your Portfolio? – Small-cap stocks provide diversification benefits to a large-cap stock portfolio, but personal factors should influence how large the allocation to small-cap stocks should be.
- Exploiting the Relative Outperformance of Small-Cap Stocks – The small-cap premium has been most significant during periods of economic expansion.
Highlights from this month’s AAII Journal
- Many Workers Don’t Stick With Automatic Savings Rate Increases – Though the intent of automatically increasing retirement savings rates every year is good, many workers don’t stick with it.
- The Top Mutual Funds Over Five Years: Health Care’s Dominance Is Weakening – Health care remained the best-performing sector in terms of five-year performance, but we’re now seeing a broader mix of funds at the top of the rankings.
AAII Sentiment Survey
Pessimism bounced back after two weeks of declining. At the same time, neutral and bullish sentiment declined compared to last week. More about this week’s results.
- Bullish: 30.2%, down 5.1 points
- Neutral: 32.4%, down 1.8 points
- Bearish: 37.4%, up 6.9 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
The Week Ahead
Six members of the S&P 500 are scheduled to report: Acuity Brands (AYI) on Tuesday; Bed Bath & Beyond (BBBY), Monsanto (MON) and Walgreens Boots Alliance (WBA) on Wednesday; and CarMax (KMX) and Constellation Brands (STZ) on Thursday.
The week’s first economic reports will be the March PMI manufacturing index, the March ISM manufacturing index and February construction spending, which will be released on Monday. Tuesday will feature February international trade and February factory orders. The March ADP Employment Report, the March ISM non-manufacturing index and the minutes from the March Federal Open Market Committee meeting will be released on Wednesday. Friday will feature the March jobs report, including the change in nonfarm payrolls and the unemployment rate.
Richmond Federal Reserve bank president Jeffrey Lacker will made a public appearance on Monday.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!