Small Cap Stocks and Index Funds

It is often said that mutual funds that invest in smaller companies can do better than index funds which specialize in similar, so-called smaller cap stocks. At times they have not done badly, when trying to outperform the indexes of larger companies.

But there is a fallacy here. Few managers can truly evaluate smaller companies, even less than they can evaluate larger companies. Smaller companies are more erratic than those larger, and their corporate fortunes are more difficult to anticipate.

Smaller public companies may do better than larger companies for shorter periods but are more susceptible to business hazards and cycles. ( See the Earl J. Weinreb NewsHole® comments.)