Large-Caps, Mid-Caps or Small-Caps?

Teaching tango at the University of Montreal

What the academics say

Ever since I have been reading finance books, I have been reading that Small-Cap stocks are riskier but they perform better. I see graphs and charts backing up these studies, so I decided to double-check. Is it true that Small-Cap performs better than Big-Caps?

I went to my favorite ETF provider and I looked for Big-Caps (VOO), Mid-Caps (VO), and Small-Cap (VB).

What my findings say

My findings did not corroborate the results of the academics. In fact, my findings contradict the research of academics. Maybe the academics had a different set of data, but I have to work with the data that is available to little investors like myself.

Here is a 5-year graph which showcases Large-Caps, Mid-Caps, and Small-Caps.

I was not able to find a longer-term comparison.

In the graph we can see:

  • Big-Caps going up 19.95,
  • Medium-Caps 15.81
  • Small-Caps 9.51

You might say that 5 years is not a long enough time frame to make a decision, and I agree with you, but the time frame in which an investor gets in and gets out is often random, dictated by his life circumstances, most of the time outside of his control. In any other 5 year period, the results could have been different. What the next 5 years will do, no one knows.

My conclusion

Maybe the academics are right, but I am not an academic, I am a real person with real money. I have to go with the information and the tools which are available to me at the moment.

We don’t know which sector is going to do better or worse, we don’t know whether small or large caps will perform better. If we assume that in the long run, stocks are going to go up, then let’s buy a little bit of all of them. Let’s buy Large, Mid, and Small caps. When we retire, when we begin to withdraw money to sustain our lifestyle, then we can take a look and determine which one performed better.

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