Monday, January 06, 2014

Wait for the Recession, Then Buy Small-cap ETFs

Victor Liang has noticed that Small-cap ETF funds eventually outperform the overall market, especially if purchased during a recession.

It is an interesting article.  But it has four problems as an investment strategy.

First, the required time-frame of 10+ years makes this strategy viable primarily for how to invest for your kids.  Most investors do not have so many years to wait.

Second, the strategy does not understand or describe its risks.  Investors that want to use this strategy do not know what to do with their other investments to balance its weaknesses and manage overall risk.

Third, it is risky.  The three Small-cap ETF funds are not very old.
  • IJR was established in 2000
  • VBR was established in 2004
  • SLY was established in 2010
Thus the "pattern" of outperforming over a ten-year period has only had time to happen once.  It is a risky bet that the pattern will repeat regularly.

Fourth, it is chasing gains.  Small-cap stocks surged last year.  Because the proposed strategy has such a long-term focus this would not be such a harsh criticism, except for the previous point that the "pattern" is not well-founded.

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