Getting What You Pay For

There's only one free lunch in finance.

Diversification.

Everything else comes at a price.

If you are lucky you don't know the price you pay - ignorance is bliss.

But for the rest of us, we live an uneasy life, unable to resist the lure of dark corners.

In previous posts I have found that negative gamma explains the

so it would be remiss to ignore the small cap versus growth premium.

It's hard to see, but the beta of the small cap returns against the S&P 500 during upswings is 0.98.

I.e. when things have been good over the past 15 years, expect to see 98% of the returns you would normally see with the S&P 500 on average.

There's a more noticeable difference during downturns. The small cap fund's beta is 1.03. So you would lose 103% of the S&P 500's losses on average when things go wrong.

These type of 'premium' portfolios work OK during low volatility periods, and that's perfectly fine.

It's how they are engineered, showing good returns on average but serious weaknesses during large swings.

Welcome to the financial dark side.