Friday, January 20, 2006


The resilient Russell 2000

What an ugly end to the week! For the week as a whole, my portfolio declined $3,819 (0.6 percent). While this performance was better than the S&P 500 (down 2 percent) and the NASDAQ (down 3 percent), it was slightly worse than the Russell 2000, which declined only 0.5 percent for the week.

One common misperception that most investors have is that small caps are more risky than larger stocks. That's true only if you focus on individual stocks. Small caps are more volatile than larger stocks as measured by their standard deviations. However, if you consider a well diversified portfolio of small cap stocks, the small cap portfolio is typically no more volatile nor has a higher market beta than a large cap portfolio. Indeed, during times of market pressure (like today's plunge in the markets), small caps often outperform. During black Monday in the 1987 crash, the mega cap Dow 30 fell 22.6 percent, the large cap S&P 500 fell 20.1 percent, but the small cap Russell 2000 fell only 12.5 percent.

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