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Middle-of-the-Road Investing, Treasuries, and More

A roundup of investment news.

Morningstar Analysts, 08/03/2009

Middle-of-the-Road Strategy Can Pay off in the End
Small caps historically have outperformed large caps as the economy emerges from recessions. Since the market lows in March, small caps have handily outperformed larger stocks. Whether this trend will continue is anyone's guess, but a look at the past shows that the outperformance of small stocks and large stocks alternates over time and that these shifts in leadership between cycles can vary in length and magnitude, Morningstar research and communications manager Jim Licato says. Investors who don't want to get caught up in the commotion of guessing whether a particular cycle has started may want to consider mid-caps.

"What makes mid-caps potentially good investments is that they are large enough to have strong brand recognition yet small enough to experience solid growth," Licato says.

Licato points to the boom and bust of the 1990s and early 2000s as an example of how investors can benefit from mid-caps. In the 1990s, mid-cap stocks performed well--not as well as large-cap stocks but better than small caps. When the markets turned during the early 2000s, mid-caps weathered the turbulent market better than large stocks while slightly trailing small stocks. In both time periods, mid-cap investments provided consistent performance independent of the market's direction.

From January 2008 through May 2009 (view the related graphic here), mid-cap stocks slightly lagged both large- and small-cap stocks, with small caps leading the way. Whether large caps reassert themselves in this uneven market or small caps manage to stay on top, mid-cap investments should remain a solid option for investors who prefer not to predict the future.

Licato makes one more point: He examined the risk and return statistics of all three size groupings over the past 15 years and found that mid-caps produced the highest return of all three (6.5%) for the least amount of risk, as measured by standard deviation (19.6%).

A Contrarian's Take on Treasuries
Over on MorningstarAdvisor.com's Markets & Economy blog, financial advisor and blog contributor Janet Briaud gives a few reasons why it makes sense to have some Treasury bonds in your clients' portfolios:

1. There is still the possibility of deflation. "In fact, in the Financial Times' Economic Outlook (the week of June 14), we see that we are already experiencing some deflation: The annual CPI rate has fallen to -0.9%," Briaud writes.

2. The prices of goods are declining, especially large items such as houses, electronics, and cars. As investors wait on the sidelines for even cheaper prices, you have deflation.

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