If academic research demonstrates that small cap/value stocks have higher returns than large cap/growth stocks over time, why not put 100% of the equity allocation into small cap and value stocks?
For investors who define risk solely as the variability of returns, such a strategy might be appropriate. Whether such investors actually exist is debatable. Most investors are probably sensitive to the risk of being different from the market, even if overall variability is no higher. Small cap and value stocks do not outperform market portfolios regularly or predictably – if they did, they would not be riskier. To the extent an investor is likely to be disappointed with performance that differs from a market portfolio, a tilt toward small cap and value stocks should be undertaken cautiously.
For investors who define risk solely as the variability of returns, such a strategy might be appropriate. Whether such investors actually exist is debatable. Most investors are probably sensitive to the risk of being different from the market, even if overall variability is no higher. Small cap and value stocks do not outperform market portfolios regularly or predictably – if they did, they would not be riskier. To the extent an investor is likely to be disappointed with performance that differs from a market portfolio, a tilt toward small cap and value stocks should be undertaken cautiously. Source: DFA Click here to see the FAQs from DFA.
Related Questions
- If academic research demonstrates that small cap/value stocks have higher returns than large cap/growth stocks over time, why not put 100% of the equity allocation into small cap and value stocks?
- If academic research demonstrates that value stocks have higher returns than growth stocks or market portfolios over time, why not put 100% of the equity allocation in value stocks?
- Large vs. small cap stocks - where is the value?
