1983 is eliminated, the total accumulation in large stocks over the entire
period from 1926 through 2006 is virtually the same.
After 1983, small stocks hit a long dry period that lasted 17 years as
they underperformed large stocks, especially in the late 1990s as the
technology boom gained momentum. But when the technology bubble
burst, small stocks strongly outperformed once again. From the March
2000 peak through 2006, despite the severe intervening bear market,
small stocks enjoyed a 7.2 percent annual return, while large stocks, rep-
resented by the S&P 500 Index, returned less than 1 percent per year.
What caused the tremendous performance of small stocks during the
1975 to 1983 and 2000 to 2006 periods? In the earlier period, pension and
institutional managers found themselves attracted to smaller stocks fol-
lowing the collapse of the large-growth stocks, known as the “Nifty Fifty,”
that were so popular in the preceding bull market. In addition, the enact-
ment of the Employee Retirement Income Security Act (ERISA) by Con-
gress in 1974 made it far easier for pension funds to diversify into smallCHAPTER 9 Outperforming the Market 143
FIGURE 9–1
Small Stocks and S&P 500 Returns, 1926 through December 2006 (Including and Excluding 1975–1983)