The chart below is the one year return from smaller cap equities less the one year return on larger cap stocks. The pattern shows compared to a larger cap, smaller caps go out of favour as the line moves down and comes into favour as the line moves up. Until just recently, smaller cap shares were out of favour compared to large caps. This explains why smaller cap portfolios have underperformed holdings concentrated in large companies. But this relationship also appears to have bottomed, indicating we may see several years when smaller caps outperform larger caps.
Small caps yield higher returns than large caps over the long term.
Moreover, small cap equities appear substantially undervalued in today's market. The objective is to hold a portfolio comprised of cash, bonds and common stock. The bias will be towards equities since they provide superior returns over the long-term. The focus will be on the most attractive values and returns, although all three asset classes will be present at all times. The objective is to maximize growth by investing in the shares of medium and small-cap companies.