What Can Happen When You Listen to Market Predictions

  By Martin Weisberg
Martin Weisberg

In early 1999, many investors questioned the wisdom of investing in small cap stocks. For the ten-year period ending December 1998, the annualized return for small caps had trailed large cap stocks by 6% annually. As small stocks fell even further in the first quarter of 1999 amidst continuing large cap strength, the frustration was intense. Market observers advocated the long-term investment advantages of large cap firms and put the advocates of a diversified strategy on the defensive.

Here is a sample of what investors were reading at the time:

  • Dow Jones Asset Management, Jan/Feb 1999:  “If God is on the side of small company stocks, she is demanding much faith.”
  • Worth Magazine, February 1999:  “The time has come to examine a deep belief—the idea that small-company stocks will, in the long run, provide a higher return than large company stocks … Actual events don’t support the idea …”
  • Business Week, March 1, 1999:  “The powerful economic forces such as disinflation, globalization, and profits growth that made large caps big winners are still firmly in place … Virtually every foreseeable trend favors large companies.”
  • New York Times, March 21, 1999:  Interview with Prudential Securities director of small cap research Claudia Mott. “Right now there is no convincing reason to buy small caps …”
  • Forbes, April 6, 1999:  Kenneth Fisher of Fisher Investments wrote, “Sell smaller stocks, buy super-huge ones … that’s been the way to make money and that’s the way it’s going to continue to be for quite a while.”

So what happened in the following decade? Small cap stocks outperformed large cap stocks by 7% annually.

The moral of the story:  Do not believe the market prognosticators. The future of the markets is unknowable. Instead, invest in a diversified portfolio of index funds representing large and small companies, as well as both stocks and bonds. Concentrated portfolios are not worth the risk!

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