Two the Point — Not the Only Game in Town

No judgements. No forecasts. Just simple facts.

Over the past 10 years, investors have been conditioned to believe that U.S. large cap stocks were the only place worth investing. Through the 10 years ending December 31, 2021, it was easy to see why. U.S. large cap stocks (as represented by the S&P 500) produced a cumulative price return that was 55% more than mid-cap stocks (S&P 400) and 40% more than small-cap stocks (S&P 600). Within the context of market history, 10 years is a brief period of time and recency bias is a powerful force that drives our perception. Humans often weigh recent events more heavily than they should, while extrapolating those recent patterns too far into the future.

Historical performance supports the notion that diversifying one’s investment beyond the S&P 500’s narrow definition of “the market” is a far better long-term strategy. As interest rates have risen and investors are once again looking beyond the often-seductive growth projections of technology stocks, performance between small/mid/large stocks has shifted. Over the past 12 months, mid- and small-cap stocks have outperformed large-cap stocks by about 6.5%. Perhaps more eye-opening is the fact that over the past 20 years the cumulative outperformance balloons to 215% for small-cap and 172% for mid-cap.

Removing the bias of recent performance is helpful when considering the longer-term rationale for maintaining various exposures that appear to be persistent laggards.

Source: FactSet; Bryn Mawr Capital Management.