In my experience many people’s investment accounts (especially their 401k’s) are heavily invested in large company (aka large cap) U.S. stocks. This has led to phenomenal returns over the last 10 years, especially if you’ve invested in large cap U.S. growth stocks. However, continuing with this approach could lead to less than ideal investment performance. In this article, I discuss the danger of investing in large cap growth stocks, while also showing you other asset classes that need to be in your portfolio.
What are Large Cap Growth Stocks?
Large cap U.S. growth stocks are those that are typically more expensive than value-based stocks. In addition, they are expected to grow much faster than the overall market (hence the term growth). These companies often times don’t pay dividends as they are reinvesting their money back into the company for rapid growth.
Unbelievable Performance of Large Cap U.S. Growth Stocks
From March 2009 (the month in which the stock market bottomed out as a result of the mortgage crisis) through May 2020, large cap U.S. growth stocks (as measured by the Russell 1000 Growth Index) have returned 18.52% per year. A $500,000 investment over that 11 year period would have grown to a whopping $3.4 million.
Nothing has beaten U.S. large cap growth stocks over that time period.
You Got Lucky
If you had (or have) your money concentrated in large cap U.S. growth stocks, then consider yourself lucky. While they have done well these past 11 years, they didn’t fare very well in the prior 10 year period (2000 – 2009). During that time, they returned a negative 4% per year. And when you combine both periods (Jan 2000 – May 2020), they returned only 5.33% per year, which is less than the returns for many other asset classes.
So, despite the great performance over the last 11 years, a concentration in this asset would have produced less than stellar results over a longer time period.
Other Asset Classes to Consider
If that weren’t enough, large cap U.S. growth stocks have performed very poorly in relation to several of its peers (large cap value, mid cap growth, mid cap value, and small cap value,) when measured over various rolling time periods (see chart below). For example, there are 21 rolling 20-year periods from 1979 to 2018. During that span, U.S. large cap growth stocks only outperformed its peers in one of the 21 rolling periods (with the exception of small cap value, where it outperformed twice.). That’s a success rate of only 5%.
% of Time U.S. Large Cap Growth Outperforms (1979 - 2018)
| Rolling 20 Yr | Rolling 15 Yr | Rolling 10 Yr | Rolling 5 Yr | Rolling 3 Yr | |
| # of Rolling Periods | 21 | 26 | 31 | 36 | 38 |
| Large Cap Value | 5% | 19% | 39% | 47% | 47% |
| Mid Cap Growth | 5% | 19% | 29% | 39% | 42% |
| Mid Cap Value | 5% | 15% | 32% | 33% | 42% |
| Small Cap Value | 10% | 27% | 45% | 47% | 58% |
Indices Used in Table: Large Cap Growth (Russell 1000 Growth), Large Cap Value (Russell 1000 Value), Mid Cap Growth (Russell Midcap Growth), Mid Cap Value (Russell Midcap Value), Small Cap Growth (Russell 2000 Growth), and Small Cap Value (Russell 2000 Value).
As you can see from the chart above, large cap growth starts to accumulate more wins as the time horizons shorten. However, in only one instance (3 year rolling periods for small cap value) did large cap growth outperform over 50% of the time. As a result, there is no evidence that supports this asset class being superior. In fact, what the evidence does show is its extremely volatile nature.
Outperformance Does Not Make Up For Underperformance
You may be thinking that even though large cap growth underperforms other assets most of the time, the periods of outperformance more than make up for it (hence the 18.52% over the last 11 years). But that would not be a correct assumption. As you can see in the table below, the average rolling return for large cap growth for each of the rolling time periods pales in comparison to the other asset classes (with the exception of small cap growth – that is the true dog). This is further evidence that should warn investors to be cautious about large cap growth.
Average Rolling Rate of Return (1979 - 2018)
| Rolling 20 Yr | Rolling 15 Yr | Rolling 10 Yr | Rolling 5 Yr | Rolling 3 Yr | |
| Large Cap Growth | 10% | 9.9% | 10.3% | 11.0% | 11.3% |
| Large Cap Value | 11.5% | 11.5% | 11.8% | 12.1% | 11.8% |
| Mid Cap Growth | 11.0% | 11.0% | 11.3% | 11.9% | 12.2% |
| Mid Cap Value | 12.8% | 12.8% | 12.7% | 13.3% | 13.4% |
| Small Cap Growth | 7.6% | 7.8% | 8.1% | 8.7% | 8.2% |
| Small Cap Value | 12.0% | 12.1% | 11.8% | 12.5% | 12.5% |
Indices Used in Table: Large Cap Growth (Russell 1000 Growth), Large Cap Value (Russell 1000 Value), Mid Cap Growth (Russell Midcap Growth), Mid Cap Value (Russell Midcap Value), Small Cap Growth (Russell 2000 Growth), and Small Cap Value (Russell 2000 Value).
So, while the last 11 years have been phenomenal for U.S. large cap growth investors, history shows that this asset class is not the best asset to be invested in.
Summary
The moral of the story is to not concentrate your investments into any one single asset class. Instead you must diversify your money to protect against the unknown. But with that said, you can structure your investment portfolio to put the historical odds in your favor.
You should still own large cap growth stocks, but also mix in the other asset classes mentioned above which have demonstrated higher performance over time (again with the exception of small cap growth). In fact, give some consideration to allocating a higher percentage to these asset classes (except for small cap growth – can you see that we are not big fans of small cap growth?).
But again, beware putting a majority of your investment in large cap growth stocks as you could be in for a wild ride!
I hope that you have found this content helpful. I would love to hear how you structure your investment portfolio. Has large cap growth been good for you? Do you take a concentrated position in this asset class? Please leave your comments below and let’s start a discussion!
Brad Tinnon
CERTIFIED FINANCIAL PLANNER™
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