Market Return By Size Decile

Here are more results from the Ibbotson Yearbook. This shows the famous size premium. Researchers have found that over the long term, smaller stocks have done better than larger stocks. I’ll explain more why I think the size premium is overrated.

This chart shows the performance of the stock market by size decile, meaning each 10% size grouping of stocks. The results are almost perfectly rank ordered: The smallest have done the best and the largest have done the worst.

As impressive as this looks, the results are a bit deceptive. The reason is that the out-performance of small stocks isn’t a constant. Instead, small stocks outperform or underperform for many years at a time. If you catch the cycle right, you can do very well, but if not, you’re in for decades of lagging the market. Conisder that Decile 1 has beaten out Decile 10 over the last 29 years, and Decile 2 has edged out Decile 9 over the last 45 years.

So while it appears to be true that small stocks do better over the long term, that term is so long that it’s irrelevant for the average investor.

Posted by Eddy Elfenbein on April 2nd, 2013 at 10:37 am

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