At that point in July, large growth stocks had been returning over 19% a year since 2017, while small value stocks had lost 7.2% per year. This was the largest margin ever recorded for the two asset classes in such a period. My message at the time was that retail investors should stay strong as periods of significant underperformance are rare but expected. And for those who didn’t currently have a small cap attribution, they should consider doing so based on long term theory and data. I encourage readers to read the original article.

Since July 21stst Small cap value stocks have returned and outperformed each other significantly. With ETFs as a proxy, the Vanguard S&P Small-Cap 600 Value ETF (VIOV) outperformed the Vanguard Growth ETF (VUG) by approx. 45%, with the VIOV increasing by 62% and the VUG by 17%. Other small value ETFs like the Avantis US Small Cap Value ETF (AVUV) did even better, up nearly 72%.

Expected return

In the long run, there are differences in expected returns between stocks. For example, I expect:

  • Small-cap stocks outperform large-cap stocks

  • Value stocks to outperform growth stocks

  • High profitability stocks outperform low profitability stocks

All of these relationships can be used to build a portfolio with higher expected returns than the market with just a few mutual funds or ETFs. The weights for small cap, value, and high profitability stocks can be adjusted based on each individual’s risk preferences, much like deciding how much stocks or bonds to allocate. By overweighting stocks with higher expected returns and underweighting stocks with lower expected returns, an investor can maintain the benefits of indexing such as broad diversification, low turnover, and low costs.

One of the best attributes of this approach to beating the market is that it doesn’t require active trading or market timing. Occasionally, the only recommended maintenance is to rebalance the portfolio to predetermined weights. This can be done with software or an Excel spreadsheet. I believe that an investor who manages their portfolio this way is likely to beat the majority of other retail and professional investors over the course of their investment life.


Academic theory and long-term historical data show that low-value stocks have higher expected returns than high-growth stocks, and there are some good fund options available today to capitalize on that belief. Of course, these relationships don’t always come about over shorter periods of time Otherwise there is no risk. However, the recent resurgence of low-value stocks since my July post shows how quickly performance trends can change.

So what should you do If you missed my July post and still have little or no exposure to this category of market, now may be a good time to consider adding more weight to funds that buy low net present value stocks with robust profitability Include your portfolio. If, like me, you already have market cap weighted exposure to small cap stocks, it is probably time to review your portfolio as you may need to revert to your target allocation due to the spread of recent performance.

In July this would have resulted in reducing the large growth exposure and using the proceeds to add value, but today it would likely be the opposite. You should only consider changing your portfolio to include more small cap and value exposure if you are willing to hold onto it for the long term and know that expected returns are not guaranteed over a given time horizon.

Jesse Blom is a licensed investment advisor and vice president of Lorintine Capital, LP. He is advising clients in the US and around the world on the plant. Jesse has been in the financial services industry since 2008 and is a CERTIFIED FINANCIAL PLANNER ™ Professional. Working with a CFP® expert is the highest standard for advice on financial planning. Jesse holds a BS in Finance from Oral Roberts University.


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