by Archie M. Richards, Jr., CFP^®
November 28, 2005

For the last several years, small value stocks have grown like gangbusters. This will change. Beginning around now, big growth stocks will rule the day.

First, let's nail down the meanings of "small," "big," "value," and "growth."

Size: The size of a stock is not measured in terms of the company's revenues or earnings. It's measured in terms of the market value given the company by investors.

For example, General Electric has 10.6 billion shares of stock outstanding, owned by employees, institutions, pension plans, and individuals all over the world.

GE's price is $36.20, giving the company a market value of $382.5 billion (10.6 billion x $36.20). That's big - biggest in the world, in fact.

People in the industry use the word "capitalization" to mean the total market value. They say "cap," for short. General Electric is said to be a "big-cap" stock.

Industry is top-heavy. The few big-caps constitute most of the value. For example, The Russell 1000 Index reflects the performance of the 1,000 largest U.S. stocks. These represent 92 percent of the market value of all 14,000 publicly-held U.S. stocks. In other words, 7 percent of the stocks have 92 percent of the market values.

Valuation: Value and growth is measured in terms of the company's price-earnings ratio, called "PE," for short.

Take General Electric again. In the last four quarters, GE earned $18.6 billion. As mentioned, the market value is $382.6 billion. This capitalization exceeds the earnings by 20.6 times (382.6 divided by 18.6), making the PE 20.6.

The same calculation can be made - and usually is made - in terms of the individual shareholder. On a per-share basis, GE's latest earnings were $1.76. The price of the stock is $36.20. The price exceeds the earnings by 20.6 times (36.20 divided by 1.76), also making the PE 20.6.

Companies with relatively high PEs are called "growth" stocks. Those with relatively low PEs are called "value" stocks. The dividing line depends on who's talking.

The price-earnings ratio of all the stocks included in the Standard & Poor's Index is currently 19. You might consider stocks whose PEs are higher than 19 to be growth stocks and those lower to be value stocks.

I now compare two U.S. stock groups: big growth and small value. Over the last 5 years, small value stocks have performed well, while big growth stocks have not.

To check this out, go to www.bigcharts.com and call up the charts for the following exchange-traded funds:

iShares Russell 1000 Growth Index Fund (IWF) - big growthiShares Russell 2000 Value Index Fund (IWN) - small value

Ask for 10-year charts. They'll show the price trends for the 6 years these ETFs have been in existence.

Small value stocks have done nicely. The price of IWN was 33 in 2000. It fell slightly to 32 in 2002, and is now 67.

Big growth stocks have been disappointing. IWF reached 92 in 2000 and plummetted to 33 in 2002. The price is now 52, way below its 2000 high.

Over the next several years, these trends will reverse. To benefit, buy the aforesaid iShares Russell 1000 Growth Index Fund (IWF). You could also acquire Vanguard's Growth Index Fund (VIVAX). Either one will do the job.

In the past, I've recommended investing 10 percent each in Vanguard's big growth and big value funds and 5 percent each in its small growth and small value funds. I now change these recommendations to the following:

Big Growth - 15 percentBig Value - 5 percentSmall Growth - 7 percentSmall Value - 3 percent

Vanguard's minimum per fund is $3,000. Putting only 3 percent in small value stocks requires a total portfolio of $100,000. If your total is less, purchase ETFs at FOLIOfn. For an explanation, visit www.archierichards.com and read the column dated 11/29/04. Or wait until next week's column.

Continue allocating your funds among many investment sectors. But beef up big growth stocks a bit. For the next several years, they will once again lead the way.