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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75649  
Subject: Re: Is my wife smarter than me? Date: 8/26/2006 5:03 PM
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The volatility of small caps and mid caps is a lot more of a roller-coaster ride than you think.

More than that. "Small caps" have, at times, been the worst performing sector of the market. And, at other times (like the four-year period he's looking at) been the best.

Every asset class has its day in the sun, becomes fully valued (or, if you prefer, over-valued) and then sits and waits, sometimes for a decade until other classes catch up.

I can't find it at the moment, but I was given a presentation by Edward Jones a few years ago which showed the various asset classes and how they had done in each 5 year period over the past 20-25 years. Not one of them repeated at #1, and it was rare if any of them repeated in the same position at all. Frequently you would find one class jockeying from #4 to #2 back to #3 then to #1 and back to #3.

What I took from it was that if you chase the most recently successful asset class (following an asset allocation model rather than individual stocks) you were sure to underperform the market on a regular and continuing basis. (This is quite the same as buying last year's most successful mutual fund, because those guys rarely repeat their stellar performance year over year. There are exceptions, of course, Peter Lynch being the most famous.)

Even if you screened "individual stocks" by "small market" or "large cap" (or introduced other classes such as REITs) you would always find yourself wondering why they did so well before, and now that you own them, they're not doing so well anymore.

It is, I think, because of the herd mentality of investors - including those running mutual funds - that "hey look, that's successful, I better buy some of that", only to find out that it's already had its run, and you're just a little late to catch the train.
 
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