September 24, 2014

Mid-Sized Companies Hit the Sweet Spot

Looking over the past 35+ years of U.S. stock market index data, we notice two interesting facts:

  • Mid cap had higher returns: The mid cap stock index outperformed the large cap index by 1.8% per year.1
  • Mid cap had lower volatility over the long term: The mid cap stock index, when measured over holding periods of three years or more, was less volatile than the large cap stock index.2

For long-term investors who seek to maximize return and minimize volatility, mid cap stocks have clearly been the better investment.

Will these relationships hold in the future? 

We don’t know, but we think they could.  Mid-sized companies tend to be in the “sweet spot” of a business’s life cycle, having progressed with a proven business model to achieve economies of scale, while remaining nimble enough to compete effectively. And, given the rational tendency of risk-averse and liquidity-seeking investors to gravitate toward larger companies that are more stable and liquid in the short term, the opportunity for long-term investors to earn superior returns by investing in mid cap stocks may continue for years to come.


(1)     Based on S&P 500 and Russell Midcap Indexes, from January 1, 1979 through June 30, 2014. It is not possible to invest directly in an index. The returns of an index do not reflect the actual cost of investing in the instruments that comprise it.

(2)     Based on a comparison of the standard deviation of the above two indexes, measured over quarterly rolling three-year, five-year, seven-year, and ten-year periods.  Over shorter holding periods such as 3-12 months, mid cap stocks are more volatile than large cap stocks.

Note: Information is current as of 6/30/2014, drawn from third-party sources believed reliable but not independently verified/guaranteed by Arnerich Massena, for educational purposes only, and may not be reproduced/republished/distributed without our written consent. This information does not constitute investment advice, which would need to take into account a client’s particular investment objectives, financial situation, and needs. Investments and strategies discussed herein may not be suitable for all readers, and you should consult with an investment professional before acting upon any information or analysis contained herein. Past performance is no guarantee of future returns.