There’s a common belief among many investors that small cap stocks are the holy grail of investing, the only way to achieve substantial returns and generate alpha. However, let’s take a step back and examine this assumption by comparing the performance of small cap stocks with that of another asset class—gold.
Unconventional Comparison: Small Caps vs. Gold
Over the past two decades, we’ve seen the PSC small cap index represented by the light blue line and the price of gold represented by the dark blue line. Surprisingly, the performance of gold has been quite comparable to that of small caps. Despite their stark differences in volatility and perceived potential returns, both asset classes have exhibited similar trends over time.
This comparison offers valuable insights for investors. Firstly, it suggests that most asset classes tend to deliver somewhat similar returns in the long run. While there may be fluctuations and periods of volatility, the overall trajectory of returns remains relatively consistent across different asset classes.
Moreover, it’s essential to recognize the role of other asset classes, such as gold and real estate, in diversifying and hedging your overall portfolio. While equity owners often overlook these alternative investments, they can play a crucial role in stabilizing your portfolio and mitigating risk.
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