It’s commonly accepted on Wall Street (and in academic circles) that the stocks of smaller companies outperform those of larger ones. It’s also an established fact that those smaller stocks tend to be riskier—though those who advise investing in smaller shares say that investors are rewarded for taking on that risk.

But let’s consider the forgotten, middle child. Stocks of mid-sized companies turn the small-stock investment chestnut upside down. I think it’s high time to reconsider the belief that small stocks automatically outperform their larger brethren—even over long periods of time.

Since I’m swimming against the tide of common wisdom here, let’s go straight to the data.

In the table below, you’ll find return and risk stats for the major Russell indexes over the past 44 years—the longest common history I could find.

Consider returns. Over this 44-year stretch, returns for small-cap stocks (represented by the Russell 2000 index) didn’t outperform; they trailed large-cap stocks (the Russell Top 200) by about 0.5% per year. Trailing by 50 basis points for over four decades adds up. One hundred dollars invested in large-caps at the end of 1978 would have grown to $11,176 by the end of 2022, while that same $100 investment in small-caps would be worth $9,247.

This post is for paying subscribers only

Already have an account? Sign in.