It’s better to look at the traditional underlying drivers of small-company stock performance. Though these stocks aren’t cheap, they aren’t excessively expensive either, trading at above-average valuations versus their own history and relative to large-caps. But with earnings growth looking poised to accelerate, and interest rates likely to stay low for some time, we think SMID-caps can continue their upward march, even if there’s some valuation compression.

History suggests that consistent, long-term exposure to smaller-cap stocks is almost always a good idea — even if an investor badly bungles the timing. That was what we concluded from our “Worst Market Timer” analysis, which showed that an investor who had invested $100 in U.S. SMID-cap stocks at the worstpossible time every year since 1961 would have still vastly outperformed an investor who had bought $100 of large-cap stocks at the bestpossible time every year (Display 1). How can that be? It’s because small-company earnings have massively outpaced those of large-caps historically. When compounded over long investment horizons, this growth advantage more than offset any short-term erosion in valuations suffered from buying the stocks at their highest price every year.