Column: Size does matter with growth funds

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Commentary by Adam Cmejla 

Open up most of your brokerage, IRA or 401(k) plan statements and you’ll most likely find a plethora of investment options that you are currently invested in or have the option to allocate your funds. The typical diversified investment statement will have a general mix of domestic and international investments across both broad-equity (stock) and fixed-income (bond) asset classes.

The goal of most of these portfolios is to accomplish what every client wants in their portfolio – to gain the most amount of return with the least amount of risk possible. This, in other words, is the founding wish behind the construction of an “efficient portfolio.”

What sometimes gets overlooked, though, is the next layer of allocation among those funds. Most of the time we observe a large portion of portfolios exposed to, coincidentally, “large cap growth” funds and a significant underweighting or complete lack of small cap funds. By definition, large cap refers to companies that have a market capitalization of greater than $10 billion and “small cap” stocks generally have a total market capitalization of between $300 million and $2 billion.

However, re-evaluating a portfolio and looking at an investor’s exposure to “small cap” investments or funds is worth the time and effort if we compare the historical past performance of these investments. For this conversation, we’ll use the S&P 500 to evaluate “large cap” and the Russell 2000 index to evaluate “small cap.”

For the context of this article, let’s look back over the past fifteen years (1998 – 2013) and keep in mind this includes two recessions (dot com and financial crisis). The S&P 500 had an average return of 7.41 percent, compared to the Russell 2000 having a return of 9.07 percent.

That may not sound like much, you say – a 1.66 percent over 10 years. But if we put that into dollar terms, a $100,000 invested into either portfolio at the beginning of the time period and, assuming all dividends are reinvested, would be worth very different values: $255,285 for the S&P 500 compared to $327,632 for the Russell 2000.

So how much should you allocate to small caps?

This is impossible to answer as there are no one-size-fits-all answers in investing. This is also not to suggest that investors should rush to reallocate their entire portfolio to small cap stocks — this would be very ill-advised and there is a slightly higher degree of risk that comes along with investing in small cap stocks that must be considered.

The point to take away here is to make sure that you are taking the right amount of calculated risk for your portfolio given your goals, intentions and timeframe with your investments and to be sure that your portfolio is taking advantage of the demonstrated “size effect” of investing and that your investment philosophy is backed by academically proven, time-tested data.

That’s rather than investing with the “flavor of the year,” as is sometimes demonstrated by advisors and investors chasing past returns of a hot new fund or manager.

 

Adam Cmejla, CMFC® is President of Integrated Planning & Wealth Management, a comprehensive financial services firm located in Carmel providing comprehensive retirement planning strategies to individuals near or in retirement. He can be reached at 853-6777 or adam@integratedpwm.com.

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Column: Size does matter with growth funds

0

Commentary by Adam Cmejla 

Open up most of your brokerage, IRA or 401(k) plan statements and you’ll most likely find a plethora of investment options that you are currently invested in or have the option to allocate your funds. The typical diversified investment statement will have a general mix of domestic and international investments across both broad-equity (stock) and fixed-income (bond) asset classes.

The goal of most of these portfolios is to accomplish what every client wants in their portfolio – to gain the most amount of return with the least amount of risk possible. This, in other words, is the founding wish behind the construction of an “efficient portfolio.”

What sometimes gets overlooked, though, is the next layer of allocation among those funds. Most of the time we observe a large portion of portfolios exposed to, coincidentally, “large cap growth” funds and a significant underweighting or complete lack of small cap funds. By definition, large cap refers to companies that have a market capitalization of greater than $10 billion and “small cap” stocks generally have a total market capitalization of between $300 million and $2 billion.

However, re-evaluating a portfolio and looking at an investor’s exposure to “small cap” investments or funds is worth the time and effort if we compare the historical past performance of these investments. For this conversation, we’ll use the S&P 500 to evaluate “large cap” and the Russell 2000 index to evaluate “small cap.”

For the context of this article, let’s look back over the past fifteen years (1998 – 2013) and keep in mind this includes two recessions (dot com and financial crisis). The S&P 500 had an average return of 7.41 percent, compared to the Russell 2000 having a return of 9.07 percent.

That may not sound like much, you say – a 1.66 percent over 10 years. But if we put that into dollar terms, a $100,000 invested into either portfolio at the beginning of the time period and, assuming all dividends are reinvested, would be worth very different values: $255,285 for the S&P 500 compared to $327,632 for the Russell 2000.

So how much should you allocate to small caps?

This is impossible to answer as there are no one-size-fits-all answers in investing. This is also not to suggest that investors should rush to reallocate their entire portfolio to small cap stocks — this would be very ill-advised and there is a slightly higher degree of risk that comes along with investing in small cap stocks that must be considered.

The point to take away here is to make sure that you are taking the right amount of calculated risk for your portfolio given your goals, intentions and timeframe with your investments and to be sure that your portfolio is taking advantage of the demonstrated “size effect” of investing and that your investment philosophy is backed by academically proven, time-tested data.

That’s rather than investing with the “flavor of the year,” as is sometimes demonstrated by advisors and investors chasing past returns of a hot new fund or manager.

 

Adam Cmejla, CMFC® is President of Integrated Planning & Wealth Management, a comprehensive financial services firm located in Carmel providing comprehensive retirement planning strategies to individuals near or in retirement. He can be reached at 853-6777 or adam@integratedpwm.com.

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