Small Wonders

Through the third quarter of 2005, the Russell 2000 Index of small-cap stocks was showing a 3.38 percent total return for the year, which was 0.61 percent higher than the large-cap Standard & Poor’s 500 Index. If small-caps hold that lead over the large-caps until year-end, it will mark the seventh straight year of such outperformance.

Mutual fund results also show this phenomenon:

• Morningstar reports that small-value funds lead all diversified stock categories for 10-year (13.04 percent), five-year (14.59 percent), and three-year (24.23 percent) returns.

• Small-growth funds have not done nearly as well but they’ve still handily outperformed large-growth funds over every recent time period.

Ever since 1998, small has been beautiful. Going forward, though, that might not be the case. Small-caps in general, and small-value funds in particular, may be due for a breather after such a string of superior performance. Therefore, although you shouldn’t ignore small-caps, you probably should not put excess amounts of new money into this asset class.