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:
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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