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Small vs. large cap: While large-cap equities have performed well in recent years, small-cap stocks have historically outperformed over longer periods. This advantage is often overlooked in portfolio optimization techniques like mean variance optimization (MVO), which typically assumes returns are random over time. Blanchett also highlights the "small-cap effect," where small-cap stocks have shown robust, though variable, outperformance compared to large caps over five-year periods. His analysis suggests that small caps should be a significant part of diversified portfolios, particularly for long-term investors.

Key takeaways: Even when adjusting for forward-looking returns, small-cap stocks are shown to be increasingly attractive as your investment horizon lengthens. Whether you’ve been investing for only a short while or a long time, diversification remains a key component to addressing risk, making small-cap equities an asset worth your consideration.