LONDON (MarketWatch) — Watch out for small caps.
That’s the latest warning from legendary fund manager Jeremy Grantham, chairman of fund shop GMO and one of the few people who successfully called the 2008 crash in advance.
His firm’s latest calculations predict that investors in U.S. small-cap stocks will actually lose about a fifth of their money in real terms over the next seven or so years. That’s an annualized loss of about 2.8% after inflation.
As always when it comes to predictions, there are no guarantees. But GMO’s forecasts have a good track record.
Seeking legal advice
Many financial advisers think they don't need a lawyer when switching firms. David Harmon, partner with Norris McLaughlin & Marcus, explains the role a lawyer can play to Dow Jones' Jennifer Hoyt Cummings. Risky assets are supposed to make you money over the medium term, as compensation for owning them. Actually paying money to take risk makes no financial sense whatsoever.
The last time Grantham’s firm warned that people were actually paying for the privilege of owning risky assets was back in 2007, just before the wheels started to come off. Grantham himself, on a recent trip to London, warned about the valuations of U.S. small-cap stocks.
You can see something similar if you just take a step back from the day-to-day action of the market and take a longer view. The Russell 2000 Index /quotes/comstock/64a!i:rut RUT -1.92% of small cap stocks has recently skyrocketed against the broader market. According to FactSet, it is now by far the highest it has been against the Standard & Poor’s 500 Index /quotes/comstock/21z!i1:in\x SPX -1.39% in at least a quarter century.
It isn’t hard to work out why. Since the Federal Reserve decided to flood the world with free money, under the program known as “QE2” (like the ship) or Quantitative Easing 2, money has been chasing risk and action. Small caps give you a lot of action for the money.
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