Research and guesstimates! Yes, ‘guesstimate’ is actually a word and if you look it up in the dictionary it will have a picture of a bank economist next to it.
CommSec chief economist, Craig James predicted the ASX200 would end 2010 at 5600 – it actually ended the year at 4745.
If you listened to Craig James last year and were disappointed, don’t worry he’s got another guesstimate for you in 2011:
“…the All Ords/ASX 200 to be at 5400 at the end of 2011.”
Thanks Craig, but we won’t hold our breath.
As you may have heard the market was flat (including dividends) in 2010 and no one really knows where it’s headed in 2011, however the performance of one section of the market again validated the academic research backing it.
The Small Ordinaries Index (small cap shares), which represents the next 200 stocks beyond the ASX 100 returned 13% last year (including dividends).
Going back across the last decade, small cap shares have outperformed large cap shares – as represented by the ASX 100 – by 18 per cent.
This is no accident, Ken French and Eugene Fama, both finance professors, have shown small caps tend to outperform large cap shares.
The reason is the compensation for risk taken.
The market will discount the prices of smaller shares because they are perceived as riskier, being more of an unknown quantity, and because of this risk, they offer a higher than expected return.
This is good news for small cap share investors and a good strategy for balancing a portfolio – because small and large cap stocks behave differently; having both further diversifies a portfolio.
So while the bank economists continue to guesstimate, investors with a diversified portfolio – backed by research and exposure to towards small cap shares – will notice it performs differently to ‘the market’ reported on the news each night.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. We think we’re Tasmania’s best financial adviser and If you’d like help with your financial future, we might be Australia’s best financial planner.
