Index Investor Corner

Swedroe: Small Value Returns Persistent

July 14, 2014

It’s true that returns of small value stocks are rather persistent, but you still need to be patient.

It’s been well documented that small value stocks have provided some of the highest returns to investor portfolios over time. The following table provides annualized returns for various equity classes over the 87-year period from January 1927 to December 2013. The data is based on the Fama-French data series and excludes utilities.

Equity Class Annualized
Small Value 13.9%
Large Value 10.6%
S&P 500 10.1%
Large Growth 9.4%
Small Growth 9.2%






The dramatic outperformance of small value stocks relative to other asset classes has led many investors to consider including more exposure to them than the market’s overall exposure—about 2 percent. In addition to the large above-market return, the persistent outperformance of small value stocks has also been very high. Consider the following:

  • The data set can be broken down into 16 consecutive five-year periods from 1927 through 2006.
  • Small value stocks outperformed large growth stocks in 12, or 75 percent, of those periods.
  • Small value stocks outperformed the S&P 500 index in 11, or 68.8 percent, of those periods.
  • Small value stocks outperformed small growth stocks in 11, or 68.8 percent, of those periods.

However, even these high rates of persistence demonstrate that it’s still possible you could wait out a 10-year investment horizon and have a significant chance that small value stocks will underperform other asset classes.

My almost 20 years of experience as an advisor has taught me that even the most disciplined investors can have their patience tested by as little as only a few years of underperformance, let alone 10-year periods of underperformance. And small-value stocks underperformed the S&P 500 in almost one out of every four 10-year periods.



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