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Sizing up small company stocks versus large company stocks

- Alan Lavine and Gail Liberman

It may be time for large company stocks to do well, while small company

stocks lag.

A study by Lipper Inc., a New York-based mutual fund analytical firm, found that over the last four years ending in the first quarter of 2004, small company stock funds outperformed large company stock funds. In addition, small company stocks were less risky on the downside than large company stocks.

However, Lipper data found that large company stock mutual funds outperformed small company stock funds over the longer term--from 1994 through the first quarter of 2004. The bull market of the 1990s favored large company stocks. So large company stocks and stock funds could be due for a rebound.

Small company stocks funds--particularly funds invested in technology, industrial services and finance companies--registered strong rebounds following the last recession that ended in 2002.

Stocks in these sectors were cheap in relation to future earnings. Small company electronic and industrial stocks outperformed large company stocks in the same sectors over 75 percent the time on a weekly, monthly or quarterly basis, according to Lipper.

The Lipper study found that small and mid-size company stocks rely on domestic profits for growth. So they tend to perform well before the global economy picks up steam.

Why should all this matter?

Past trends can give you an indication of how the stocks behave. The Lipper study indicated that the use of technical analysis can help you make adjustments on how to split up your investments.

But don't bet the ranch on these price trends.

Past performance is no indication of future results-- particularly when making investment decisions based on a few years of trends. Large company and small company growth stocks and large company and small company undervalued stocks take turns as leaders of the pack. Unfortunately, you canšt predict when with any accuracy.

Longer term, historical studies based on 70 years of information tends to favor small company stocks and value stocks over large cap stocks and growth stocks. The problem is who stays invested for that long?

The best solution: Own an index fund like the Vanguard Total Market Fund. It invests in large company and small company stocks.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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