Although stocks fell for the second straight year in 2001, there were some bright spots. Small companies generally outperformed large ones, with Morningstar Inc. reporting that small-cap value funds were up 10% for the year, through November. The only other categories of equity funds showing respectable returns, precious metals (up 10%) and real estate (6%), generally hold small and medium-sized companies.
Judging by past performance, small companies may continue to lead in 2002. The last time that stocks fell for two years in a row, in 1973 and 1974, large-company stocks gained almost 15% per year in the next 10 years, through 1984, according to Ibbotson Associates, Chicago.
Small-company stocks did even better in that 1975-84 period, returning over 30% per year. A repeat performance is not guaranteed but you probably should hold some small-caps in your portfolio.
