Now back in favor, large-caps should be portfolio cornerstone

Your Funds

September 05, 2006|By Charles Jaffe | Charles Jaffe,Marketwatch

The asset class of the moment is large-company growth stocks. Two big fund firms recently sent shareholder newsletters touting the coming surge in big stocks and a third issued its top 10 reasons investors should "make an allocation to large-cap growth stocks now."

Seemingly every investment talking head on television and a legion of radio yakkers are positively ga-ga over the large-cap boom they see on the horizon.

There's some logic behind the hype. Valuations on large-cap growth stocks haven't looked this good in years, the big companies stand to benefit more than others from the falling dollar and the cycle that has that has boosted small- and midcap stocks has reached a point where historically it should be ending.

It would be a great time for average investors to buy large-cap growth funds except for one thing: They should have a big chunk of money there already.

Unless investors are following some type of timing system or believe they have significant investment knowledge, financial specialists are nearly universal in their agreement that big stocks are the cornerstone of almost every portfolio.

"In most cases, the proper portfolio has something of everything, or at least something in all of the main asset classes," says Jeff Tjornehoj, research analyst at Lipper Inc.

"You want to be diversified across capitalization, style and asset classes. You want large and mid and small and bonds and international stocks for sure. The idea is to cover as much of the market as possible, without getting ridiculous and putting some of your money into collectible cars."

Financial experts tend to tweak allocation plans around the edges, but most will tell you that an average consumer needs to have some holdings spread across the three cap sizes - large, mid and small - and some international stocks. Bonds become an increasingly important component of a portfolio over time.

Investors who have covered the large-cap growth base for the last five years have paid a price for their patience. The average large-cap growth fund, according to Lipper, has posted an annualized gain of 0.24% over the last five years compared with the 11.69% gain rung up by the average small-cap value fund.

Of course, five years ago, with the market in the throes of a steep decline, many investors were bailing out of the small stocks for the safety of bigger names. That's precisely why advisers suggest it's dangerous to chase the next hot asset class, and brings the discussion back to how investors should respond to the glowing large-cap forecasts.

Over the last three years, small-cap value stocks have, on average, gained almost 15% per year compared with 6% in the average large-cap growth fund. For someone with a portfolio that was built with equal weighting across asset classes, that discrepancy now creates opportunity.

Dan Wiener, of The Independent Advisor for Vanguard Investors newsletter, says: "Because the typical investor should always have large-cap growth exposure, this is more like an opportunity to rebalance."

Charles Jaffe is senior columnist for MarketWatch. He can be reached at Box 70, Cohasset, MA 02025-0070.

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