The economy, like society, is becoming too polarized - opinion

“We know what happens to people who stay in the middle of the road. They get run over.” – Ambrose Bierce

Men walking near screens showing falling stocks at the Tel Aviv Stock Exchange, in the center of Tel Aviv, December 23, 2018. (photo credit: MIRIAM ALSTER/FLASH90)
Men walking near screens showing falling stocks at the Tel Aviv Stock Exchange, in the center of Tel Aviv, December 23, 2018.
(photo credit: MIRIAM ALSTER/FLASH90)

It seems like society is becoming more and more polarized. Michael Dimock of Pew Research writes, “The US is hardly the only country wrestling with deepening political fissures. Brexit has polarized British politics, the rise of populist parties has disrupted party systems across Europe, and cultural conflict and economic anxieties have intensified old cleavages and created new ones in many advanced democracies. America and other advanced economies face many common strains over how opportunity is distributed in a global economy and how our culture adapts to growing diversity in an interconnected world.”

Maimonides (Hilchot Daot 1:3-4) comments on man’s optimal behavior: “The two extremes of each trait, which are at a distance from one another, do not reflect a proper path. It is not fitting that a man should behave in accordance with these extremes or teach them to himself. If he finds that his nature leans toward one of the extremes or adapts itself easily to it, or if he has learned one of the extremes and acts accordingly, he should bring himself back to what is proper and walk in the path of the good. This is the straight path.”

He continues, “The straight path: This [involves discovering] the midpoint temperament of each and every trait that man possesses. This refers to the trait that is equidistant from either of the extremes, without being close to either of them. Therefore, the early sages instructed a man to evaluate his traits, to calculate them and to direct them along the middle path, so that he will be sound.”

Just like with behavioral perfection, we need to strive to search out the middle path when it comes to investing. The one asset class is often forgotten as part of an investment portfolio is mid-cap stocks. These stocks tend to fall between the cracks. Just like in politics, investors like extremes. They tend to focus on well-known household names, which tend to be the largest companies in the world, large caps and small caps known for their high growth potential. 

AS I HAVE quoted in the past, Jon K. Christensen, CFA, portfolio manager, and senior research analyst at KAR writes, “The lines between market-cap categories can be blurry, leading many investors to believe that owning both large and small stocks provides sufficient exposure across the market-cap spectrum. In fact, data point to a clear underrepresentation of the asset class. Mid caps make up about 26% of the overall equity market, according to a breakdown of the Russell indexes, but actual investments into the asset class only account for about 13% of all invested assets, as represented by Morningstar asset flows.”

This lack of investor attention has been unfortunate, as mid-cap stocks tend to boost return and lower risk. In recent research, Touchstone Investments reports, “Mid-cap stocks are uniquely positioned between small, developing companies and large, mature companies. Mid-cap companies are typically small-cap companies that have succeeded. Because they have survived the small-cap phase, mid caps are in a position to benefit from enhanced access to the capital markets, potentially giving them a financial advantage over small caps. Compared to large-cap companies, mid caps are often in the growth phase of the business life cycle where they may be experiencing higher cash flows and earnings growth rates.”

While past performance is no indication of future returns, over the last 20 years, mid-cap stocks have trounced their small and large-cap rivals. Matthew J. Bartolini, CFA, Head of SPDR Americas Research writes, “Since 1997 in months where the S&P 500 Index posted a positive return, mid caps outperformed large caps 64% of the time and small caps 51% of time. Conversely, in months where the S&P 500 declined, mid caps outperformed small caps 57% of the time. This highlights mid caps’ ability to generate higher absolute returns while potentially reducing downside risk relative to small caps.”

Especially now in times of wild market swings, it may pay to speak with your financial advisor and discuss adding mid-cap stocks to your investment portfolio. To repeat; just because mid-caps have outperformed in the past doesn’t mean anything about their future returns. Nonetheless, in many ways you will get the best of both worlds. The potential for higher returns and lower risk, which is after all, what most investors want.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email [email protected]