Considering Your Goals

How much do you need or want to earn? That may seem like an extraordinarily stupid question for me to ask you! Who doesn’t want to earn a high
return? However, although investing in stocks, real estate, or a small business can produce high long-term returns, investing in these vehicles comes
with greater risk, especially over the short term.

Some people can’t stomach the risk. Others are at a time in their lives when

they can’t afford to take great risk. If you’re near or in retirement, your

portfolio and nerves may not be able to wait a decade for your riskier investments to recover after a major stumble. Perhaps you have sufficient assets to

accomplish your financial goals and are concerned with preserving what you

do have rather than risking it to grow more wealth.

If you work for a living, odds are that you need and want to make your investments grow at a healthy clip. If your investments grow slowly, you may fall

short of your goals of owning a home or retiring or changing careers.

Are smaller-company stock returns higher?

Stocks are generally classified by the size of the

company. Small-company stocks aren’t stocks

that physically small companies issue — they’re

simply stocks issued by companies that haven’t

reached the size of corporate behemoths such

as IBM, AT&T, or Coca-Cola. The Standard &

Poor’s 500 index tracks the performance of 500

large-company stocks in the United States. The

Russell 2000 index tracks the performance of

2,000 smaller-company U.S. stocks.

Small-company stocks have outperformed

larger-company stocks during the past seven

decades. Historically, small-company stocks

have produced slightly higher compounded

annual returns than large-company stocks.

However, nearly all this extra performance is

due to just one high-performance time period,

from the mid-1970s to the early 1980s. If you

eliminate this time period from the data, small

stocks have had virtually identical returns to

those of larger-company stocks.

Also, be aware that small-company stocks can

get hammered in down markets. For example,

during the Great Depression, small-company

stocks plunged more than 85 percent between

1929 and 1932, while the S&P 500 fell 64 percent. In 1937, small-company stocks plummeted

58 percent, while the S&P 500 fell 35 percent.

And in 1969 to 1970, small-company stocks fell

38 percent, while the S&P 500 fell just 5 percent.