3-Chart History Lesson
In 2017 thus far, the only thing more dominant than the L.A. Dodgers may be large cap growth investing.
Through July, large cap growth is up over 17%, beating the S&P 500’s impressive 12% return. At the other end of the spectrum, small cap value investors have seen a minuscule 1% return, as seen in the chart below. But there’s something eerily familiar about these year-to-date results …
And here’s where the history lesson begins. The second chart below shows the same two indices from March 1998 through March 2000. Again, large cap growth crushing small cap value, but back then the dominance was even more exaggerated. At the height of the dot com frenzy, large cap growth returned a whopping 66% while small cap value lost 17% over those same 2 years. The performance gap grew to over 80 percentage points by March of 2000:
With that kind of gap, it’s not surprising so many investors abandoned whatever they were doing to climb on to the large cap growth bandwagon. But here’s where seasoned investors know that cycles occur regularly within markets like these. As our third chart below shows, patient investors are often rewarded. From the peak of the internet bubble through September 2007 (a few months before the 2008 recession began), large cap growth lost 31%. Small cap value, meanwhile, returned 131%, more than making up for missing the go-go 1990s.
This illustration isn’t unique, as extreme peaks and troughs can be seen throughout financial history. The moral of this story is to stick to your guns and avoid joining the crowds at the worst time. Will power is good, but a disciplined investment process is even better.