Fifteen favourite fallacies

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4. "Blue chips are best/Smaller companies are best"

Another false dichotomy. The 1990's was a period that illustrated very neatly the dangers of sticking too rigidly to either view. From 1995-97, larger companies outperformed smaller ones dramatically. By mid-97, the FTSE 100 had risen 28.5% while the SmallCap Index excluding investment trusts had fallen by nearly 1%.

Of course, this turned out to be a signal that the pendulum was about to swing back. In the next two years, smaller companies picked up speed. In the twelve months to the end of 1999, the SmallCap Index soared 49%, while the FTSE 100 increased by 19%.

Such fluctuations in performance suggest that large and small companies both have their place in growth portfolios:

• A static, balanced portfolio should maintain constant exposure to both, so as not to miss out on sudden spurts of growth
• A dynamic, traded portfolio will switch between the sectors according to which has the most momentum, so as to maximise the potential for growth.

In a static portfolio, you clearly do not want frequent chops and changes. A good strategy may therefore be to invest in a mix of

1. UK small company trusts
2. Global smallcap growth funds, e.g. in health or technology
3. A few largecap growth companies that are leaders in their industries.

Until its recent problems, Microsoft was a fine example of a company that would have made an excellent investment at any stage of its growth. Starting as a two-man band in 1975, it had become the largest company in the world by 1998. Even when it became a juggernaut, it still delivered share price gains of over 50% year after year.

In a dynamic portfolio, you need to stay alert for signals that smallcaps are starting to outperform. A study of the US market from 1926-96 found one simple indicator worked very well: "Small-cap stocks outperformed big stocks during times when nominal GDP was booming, but have lagged when it was slowing". In other words, switch to smaller companies when you see economic growth accelerating at a rate faster than inflation (as happened from 1998-2000).

1. "Investing is just gambling anyway, so why not take a few chances?" 2. "You've got to speculate to accumulate" 3. "Growth always wins in the end/Value always wins in the end" 4. "Blue chips are best/Smaller companies are best" 5. "Penny shares are the best value for money" 6. "It's such a great company, I can't go wrong" 7. "But just look at the dividends" 8. "I've got to be in technology/biotechnology/telecoms etc" 9. "I missed that one, I'll catch the next one" 10. "Paper losses aren't real" 11. "I'll never go broke taking a profit" 12. "It can't possibly go any lower" 13. "It can't possibly go any higher" 14. I can't sell because of the tax bill 15. "This time it's different" 16. Conclusion

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