QUESTION: People say most of the gains are made in small cap stocks and the large cap indices are boring. Is this correct?
ANSWER: No. “People” who say that are small cap equities managers with a vested interest, or idiots who have never looked at the data.
Below is a table that comprises the 1 year price movements of the five best, and worst, performing stocks in the S&P Global 100 index and its tracker exchange traded fund (“ETF). The range was +189% to -41%, with the benchmark at 17%
| Name | Change % (1Y) |
| NVIDIA Corporation | 189% |
| Broadcom Inc. | 83% |
| Mitsubishi UFJ Financial Group Inc. | 67% |
| Eli Lilly and Company | 66% |
| Banco Bilbao Vizcaya Argentaria S.A. | 60% |
| iShares Trust – iShares Global 100 ETF | 17% |
| Anglo American plc | -31% |
| Roche Holding AG | -32% |
| Bristol-Myers Squibb Company | -37% |
| Pfizer Inc. | -38% |
| Bayer Aktiengesellschaft | -41% |
Source: Koyfin data.
What the table shows is there plenty of excitement for stock picking in the large cap. However, unlike the small cap benchmarks you can short the 100 largest companies in the world if you think they are losers easily, and cheaply, with derivatives. Try that with small cap stock (anything less than a $1bn), or microchip stock.
ACTION PLAN:
- If you still don’t understand how diverse the possible outcomes in any investment benchmark are, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
- The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
- Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy, or sell (short). For the DIY folks, that will most likely be an index. For professional investment managers, it will be buying/selling individual stocks, bonds, realty or leaving money in cash in a well constructed portfolio. Also, it may mean not holding any equities (as even cheap stocks go down when the tide floods out).
- Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.