US small caps have been among the best-performing equities since the Nov. 8 presidential election in America.
However, there is a problem with the segment: it tends to be relatively volatile, which can easily scare investors out of their positions.
Earlier this year, benchmark small cap index Russell 2000 lost about 30 percent, and was even taken as a sign that the uptrend of the US stock market has ended.
Following the recent rally, Russell 2000 has gained more than 40 percent from the year’s low point.
Over the past 37 years, the annual average return of Russell 2000 is about 11 percent, largely the same as that of S&P 500.
Nevertheless, the small cap market as measured by Russell 2000 has witnessed 10 bear markets while the S&P index has seen large declines exceeding 20 percent only four times.
Given the comparable long-term return, funds tracking Russell 2000 are definitely worth including in a portfolio set up for retirement purpose.
To manage the volatility and avoid the tricky timing issue, a dollar cost averaging approach might be the best way to gain from Russell 2000′s long-term potential, as such method can take advantage of the often sharper and more frequent declines of the index.
The full article appeared in the Hong Kong Economic Journal in Chinese on Dec. 1
Translation by Raymond Tsoi
[Chinese version 中文版]
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