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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Wednesday, June 07, 2006

Small-cap Stock Historical Excess Return

Yesterday we discussed the importance of the volitility of small-cap stocks in your portfolio. Today, we will look at the historical excess return of small-cap stocks over large cap stocks.

Positive excess return for small caps have been larger than negative excess returns on average over the period of 1926 through 2000. There were 42 years where excess returns for small-caps over large-caps were positive and 33 negative years. From 1926-2000 small caps returned 12.6% and large-caps returned 11.0%. Small-caps are more risky than large-cap stocks and more volitile. Over this period there have been 23 negative periods for small-cap stocks and 21 negative periods for large caps.

What this means is that to invest (and be diversified) takes will to stay through the rough times of poor performance because the excess returns of small-caps stocks are worth the volitility and down periods because of their excess return they give in good times.

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