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Empowered Investor: A Guide to Building Better
Portfolios by Keith Matthews
Price $15.95>> 
 Increase
Your Portfolio Returns: Think Small Companies
Small-Company Stocks Outperform Large-Company Stocks
The last couple of years have provided dramatic evidence for
the benefits of diversifying your portfolio by including small
capitalization stocks. Small-company stocks have increased in value
since 1999, while large-company growth stocks have experienced significant
price corrections. A portfolio that has held a diversified group
of small companies will have weathered the storm better than a portfolio
that held only large companies.
The small-company effect was first identified by Rolf Banz of the
University of Chicago. In 1981, he published a report based on his
analysis of NYSE companies from 1926 to 1975, and concluded that
in the long term, small companies have higher expected returns than
large companies, and that they behave differently.
As mentioned in the previous chapter, the landmark Fama/French
study entitled “The Cross Section of Expected Stock Returns”
reported that two classes of stocks have tended to perform better
than the market as a whole: (1) small caps and (2) stocks, with
a high book-value-to-price ratio (Chapter 8). In essence, the greater
the risk exposure, the greater the expected return. Their report
confirmed the earlier work done by Rolf Banz.
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