Will Russell 2000 Ever Outperform Again?
I’ve had a good chunk of my 401k invested in the Russell 2000 the last decade and it’s been pretty miserable. I keep thinking that if/when the tech bubble implodes, that I will be more insulated from it and eventually outperform. It’s been a decade and the Russell seems to underperform the S&P in bull markets, bear markets, and when things are trading sideways.
I’ve heard some good arguments for long-term underperformance like:
1) The Russell 2000 has a habit of kicking its strongest performers out of the index over time.
2) Profitable companies outperform non-profitable companies in the long run and the Russell 2000 has a lot of non-profitable companies.
3) Venture capital and private equity have enabled companies to stay private longer and many of the hottest names are too big for the Russell 2000 by the time they IPO. Unlike back in the day where Microsoft, Apple, Amazon, etc. were all small caps at some point.
4) Technology is the future and you aren’t going to outperform with an index that has less exposure to tech.
Looking back at the last century the gap between small cap and large cap performance is much more narrow and my gut feeling tells me that at some point in time, all the negatives I just mentioned get baked into the pricing.
Am I a moron for keeping this kind of allocation to small caps? Do any of you equities guys see catalyst(s) for small caps to outperform the S&P over the next decade?
I’m just a simple commercial real estate investor hoping a broken clock is right twice per day at this point. I also am suffering from FOMO, as I get the feeling as soon as I rebalance my portfolio, the Russell 2000 is going to go on a tear.
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