Swedroe: Small Value Returns Persistent

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

Reviewed by: Larry Swedroe
Edited by: Larry Swedroe

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 ClassAnnualized
Small Value13.9%
Large Value10.6%
S&P 50010.1%
Large Growth9.4%
Small Growth9.2%






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.


A dramatic example of the potential for underperformance is the five-year period ending in 1999. Small value stocks underperformed the S&P 500 by 13.8 percentage points in that period. The S&P returned 28.6 percent, while the Fama-French small value stocks, ex-utilities, returned 14.8 percent. The longest period when small value stocks underperformed the S&P 500 was the 19-year period from 1984-2002.

Such periods create risk for investors falling prey to the dreaded disease known as “tracking error regret.” Investors abandon their well-thought-out, long-term plans because their portfolio has underperformed some popular market index, such as the S&P 500.

While small value stocks have exhibited a high degree of persistent outperformance, there’s certainly no guarantee they will do so in the future, no matter how long your investment horizon. Any asset class can underperform for long periods.

If you doubt this, just consider folks who invested in Japanese equities, who have experienced negative returns of 1.9 percent a year for the period from January 1990 through December 2013. But if you’re not prepared to experience very long periods of underperformance, you shouldn’t invest. That’s true whether we’re talking about stocks or bonds in general, or any individual asset class.

One of my favorite expressions is that diversification is the only free lunch in investing. So you might as well eat as much of it as you can. But to enjoy the benefits of diversification, you must be patient. Otherwise, you’re likely to catch that tracking-error disease and abandon your plan. It’s those stop-and-start approaches to investing that doom most investors to poor returns. They own stocks but end up with bondlike returns.

While my own personal portfolio—which the New York Times referred to as the “Larry Portfolio”—holds almost exclusively small value stocks, you shouldn’t consider it, or anything close to it, unless you are a highly disciplined investor who doesn’t confuse strategy and outcome, and is thus willing to stay the course through good and bad times. Being forewarned is forearmed.

Larry Swedroe is the director of Research for the BAM Alliance, a community of more than 130 independent registered investment advisors throughout the country.

Larry Swedroe is a principal and the director of research for Buckingham Strategic Wealth, an independent member of the BAM Alliance. Previously, he was vice chairman of Prudential Home Mortgage.