The Small Cap Lesson from Index Investing for Dummies
Submitted by Van Beek on April 20, 2011 - 10:18
(Click and drag the chart to a new tab to see an enlargement)
Index Investing for Dummies tells us about the opportunity that Small Cap index funds are offering for all investors. At Stock Trend Investing we build on this and show you how Trend Investors can easily follow the long-term trends in Small Cap indices.
The DJIA is a price-weighting index of 30 large-cap stocks. The S&P 500 is a market-value weighted index that consists of the 500 leaders in important industries in the US that are not necessary the largest companies in market- value.
The Small Cap Index Advantage
However, one disadvantage of the S&P 500 is that it is very widely held, pushing up the stocks in the index, and that small caps are underrepresented.
Index investing for Dummies stresses:
“Over time, small cap stocks clearly outperformed larger company stocks. It pays to have both large company and small company stocks in your portfolio because they tend to do better (or worse) at different times.”
To capitalize on the performance of Small Caps, Index Investing for Dummies recommends:
“If your total stock portfolio is over $20,000 and the total amount you have allocated to US stock is above $10,000, consider splitting your domestic holdings into large cap and small cap.”
How to Follow Small Cap Index Trends
At the top of this page you see the 5-year chart that shows how the S&P 500 (green) has done versus a US Large Cap Index (red) and a US Small Cap Index (blue): different performance levels but the same direction of the long-term trend.
The performance during a certain period between large cap, small cap and the S&P 500 may differ, but the long-term trend direction is the same. This means that it works very well to use the trend signals from the S&P 500 and other US market indices for the trend following of US Small Cap and US Large Cap Index funds.
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