Lessons From My Investing Past

Lessons from my Investing Past

By Shelley Murasko

Whether we are willing to admit it or not, we have all made investing mistakes. How we define “investing mistake” is certainly in the eye of the beholder. I consider an investing mistake to be one where for a prolonged period of time, say more than 3 years, I dedicated a sizeable sum of money (more than $5000) towards an idea that trailed the performance of other available options within my reasonable, age-appropriate purview. Fortunately, I have generally not been an individual stock picker or market timer; nonetheless, I have erred in my investing ways and share these lessons in hopes that they can make a difference in your financial life.

If I were to go back and do it all over again, I would have avoided the following mistakes:

1.     Investing in a mutual fund where I paid a 5.75% load (upfront) fee for many years while I could have been investing in a low cost, better performing index fund.  In general, I should have had my eye on investment fees at a much earlier age! Fees within mutual funds can be like termites nipping away at your retirement dreams, and eventually the house caves in!

2.     At a young age, investing a large part of my 401K in a bond fund.  In my first post-college job, Human Resources presented a list of 401k investment choices, and with little to no research, I invested in a bit of everything. Fast forward a few years, I learned that this “buffet” approach to investing is NOT DIVERSIFICATION. Although bonds can be helpful, they play a specific role in protecting cashflow needs that my risk tolerance and timing did not dictate at my young age.

3.     Lastly, largely ignoring small cap, value stocks.  I did not realize the potential for enhanced returns as well as broader diversification by over-weighting small cap, value stocks in my portfolio.

In this piece, let’s explore the small cap, value over-weighting idea a bit further.

Over the past 20 years, U.S. small cap, value companies as a collection have outperformed the large cap S&P 500 index by 4.6%.1.  Where the S&P 500 during that time delivered an annualized average return of 7.2%, the Dimensional Small Cap, Value index, tracked to an 11.8% average annual return. 

Granted this outperformance does not come without a catch.

For starters, investing in the small cap, value index fund requires a greater tolerance for volatility. The small cap, value index has had two additional negative performance years during the 20-year timeframe and about a third more volatility.

Second, the US small cap, value company collection did not track evenly with the S&P 500. In some years like 1998, the large cap S&P 500 soared at a 29% return while the small cap, value companies plunged a negative 6%. Therefore, an investor would have had to stomach not only volatility but also vast deviation from the more commonly followed large cap stocks.  
Four additional percentage points on average return may not sound too sexy. As calculated on an original investment of $100,000 over 40 years, we are talking about a difference between $6.5 Million vs. $1.5 Million over that time frame. Though one probably wouldn't invest exclusively in a small cap, value fund, it is clear that its inclusion could make a significant different at retirement age.

What’s the best way to incorporate small cap, value stocks? While Benjamin Graham in The Intelligent Investor wrote the book on value investing, and Warren Buffett showed us how valuable “value” investing can be, Dimensional Fund Advisors under the guidance of Eugene Fama and Ken French, Nobel prize winners for their work on small cap, value research, have created what may be considered the top mutual funds, which allow everyday people to take part in this style of investing. 

Haven’t heard of Dimensional Funds (DFA)? It’s probably because you generally can’t access them unless they are part of a 401k, 529 plan or through an investment advisor.  In addition, you won’t see DFA wasting their dollars advertising during the Super Bowl. Like Vanguard, they promote low cost investing. Even Vanguard has increasingly offered small cap, value index funds and recently launched new broad US stock funds with a small cap value tilt much like DFA.  

Small cap, value investing is not for everyone. For those with a short time horizon or an undisciplined investing past, BUYER BEWARE! For those sophisticated investors who have demonstrated a disciplined investing past, learning more about investing in small cap, value style might prove advantageous.

Before you jump in wholeheartedly to a small cap, value stock index fund, it behooves you to understand how finicky the small cap and value “premiums” can be.

Small cap, value stocks over the past 5 years have trailed the large cap stocks by 1%.  There have been several long time periods, at times 10 years or more, where the premiums are not expressed.  

Highlighted in the article reprinted below by Weston Wellington, Vice President at DFA, you can learn more about one of the most treacherous time periods for the value premium.   

Enjoy this reprinted article from DFA’s website (https://us.dimensional.com/) :

A Vanishing Value Premium? By Weston Wellington, January 2016

Value stocks underperformed growth stocks by a material margin in the US last year. However, the magnitude and duration of the recent negative value premium are not unprecedented. This column reviews a previous period when challenging performance caused many to question the benefits of value investing. The subsequent results serve as a reminder about the importance of discipline.

Measured by the difference between the Russell 1000 Growth and Russell 1000 Value indices, value stocks delivered the weakest relative performance in seven years. Moreover, as of year-end 2015, value stocks returned less than growth stocks over the past one, three, five, 10, and 13 years.

Unsurprisingly, some investors with a value tilt to their portfolios are finding their patience sorely tested. We suspect at least a few will find these results sufficiently discouraging and may contemplate abandoning value stocks entirely.

Total Return for 12 Months Ending December 31, 2015

Russell 1000 Growth Index


Russell 1000 Value Index


Value minus Growth


Before taking such a big step, let’s review a previous period when value strategies underperformed to gain some perspective.

As many growth stocks and technology-related firms soared in value in the mid- to late 1990s, value strategies delivered positive returns but fell far behind in the relative performance race. At year-end 1998, value stocks had underperformed growth stocks over the previous one, three, five, 10, 15, and 20 years. The inception of the Russell indices was January 1979, so all the available data (20 years) from the most widely followed benchmarks indicated superior performance for growth stocks.

To some investors, it seemed foolish for money managers to hold “old economy” stocks like Caterpillar (−3.1% total return for 1998) while “new economy” stocks like Yahoo! Inc. appeared to be the wave of the future (743% total return for 1998).

Many value-oriented managers counseled patience, but for them the worst was yet to come. In 1999, growth stocks shone even brighter as value trailed by the largest calendar year margin in the history of the Russell indices—over 25%.

Total Return for 1999

Russell 1000 Growth Index


Russell 1000 Value Index


Value minus Growth


In the first quarter of 2000, growth stocks bolted out of the gate and streaked to a 7% return while value stocks returned only 0.48%. As of March 31, 2000, value stocks had underperformed growth stocks by 5.61% per year for the previous 10 years and by 1.49% per year since the inception of the Russell indices in 1979.

A Wall Street Journal article appearing in January profiled a prominent value-oriented fund manager who regularly received angry letters and email messages; his fund shareholders ridiculed him for avoiding technology-related investments. Two months later he was replaced as portfolio manager amidst persistent shareholder redemptions.

With value stocks falling so far behind in the relative performance race, it seemed plausible that value stocks would need a lifetime to catch up, if they ever could. It took less than a year.

By November 2000, value stocks had delivered modestly higher returns than growth stocks since index inception (21 years, 11 months). By month-end February 2001, value stocks had outperformed growth over the previous one, three, five, 10, and 20 years and since-inception periods.

The reversal was dramatic. Over the period April 2000 to November, value stocks outperformed growth stocks by 26.7% and by 39.7% from April 2000 to February 2001.

This type of result is not confined to the technology boom-and-bust experience of the late 1990s. Although less pronounced, a similar reversal took place following a lengthy period of value stock underperformance ending in December 1991.

We can find similar evidence with other premiums:

• From January 1995 to December 1999, the annualized size premium was negative by approximately 963 basis points (bps), amounting to a cumulative total return difference of approximately 113%. Within the next 18 months, the entire cumulative difference had been made up.

• From January 1995 to December 2001, the annualized size premium was positive by approximately 157 bps.

The moral of the story?

Prices are difficult to predict at either the individual security level or the asset class level, and dramatic changes in relative performance can take place in a short period of time.

While there is a sound economic rationale and empirical evidence to support our expectation that value stocks will outperform growth stocks and small caps will outperform large caps over longer periods, we know that value and small caps can underperform over any given period. Results from previous periods reinforce the importance of discipline in pursuing these premiums.

This article by Wellington highlights the importance of staying disciplined. The premiums associated with size and value may show up quickly and with large magnitude. There is no guarantee that the size or value premium will be positive over any period, but investors put the odds of achieving augmented returns in their favor by maintaining constant exposure to these dimensions of higher expected returns.

There are many ways to pursue the small cap, value premium.  Whether it is DFA, Vanguard, or the hundreds of other firms offering small cap, value funds, an investing advantage may be the result if done with great patience and discipline. As with most investing decisions, one must know thyself. For those looking for some guidance in this area, Wealthspring Financial Planners is here to help.

1.      S&P 500 index 20 year performance, Dimensional Fund Advisor Matrix Book 2018, “Historical Returns Data-US Dollars”, p.15. Dimensional US Small Cap, Value Index 20 year performance, Dimensional Fund Advisor Matrix Book 2018, “Historical Returns Data-US Dollars”, p. 39. Dates: 1998-2017.

2.      Wei Dai, “Premium Timing with Valuation Ratios” (white paper, Dimensional Fund Advisors, September 2016).

3.      Size premium: the return difference between small capitalization stocks and large capitalization stocks. Value premium: the return difference between stocks with low relative prices (value) and stocks with high relative prices (growth). Profitability premium: The return difference between stocks of companies with high profitability over those with low profitability.


Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks. 

Wealthspring Financial Planners is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.