allocation -- small cap vs large cap

[Anonymous]

I'm investing mainly in index funds and trying to figure out a plan for how much small cap vs. large cap.

Most places say to invest mainly in large cap, and nobody ever says to invest more in small cap than large cap.

http://www.aaii.com/asset-allocation

However, small cap stocks have outperformed consistently for the last20 years.

http://stock-chartist.com/2013/01/focusing-on-the-russell-2000-index/

Does anyone invest in majority small cap? I figure that by using index funds, the diversification takes care of a lot of the volatility. Thanks!

[Anonymous]

I invest in small cap but not a majority of assets (or even equity assets). You're right that generally small cap outperforms large, but the volatility means that on a risk adjusted basis, the performance differential is not as compelling.

Small cap is one of the better places to use active management because it's easier for an active manager to outperform the index due to the inefficiencies of the market, number of companies in the universe, and reduced analyst coverage relative to large cap.

Using an index fund won't necessarily dampen volatility because the companies in the index are inherently more volatile due to their market cap.

[Anonymous]

Small caps are supposed to best for coming out of recessions, but this time they haven't caught on fire (obviously, we've had a non-typical recession). So my small caps have performed worse than my large caps over the last 10 years, but I'm still holding the small caps for future returns. (I do have much more in large caps.)

[Anonymous]

We're actually overweighted internationally (mainly Asia) because that's where we expect the big growth to happen. Like 11:56, we haven't seen great results from small caps over the past decade. Midcaps actually did better.