Maybe you could help me with this decision. My 401(k) will make available a small-cap index fund that mimics the
Russell 2000 index. I heard you say that indexing is a good way to invest in 401(k) plans. Do you think the small-cap index fund would be a decent choice? It is the only small-cap fund open for consideration. -- Nancy Lingenfelter A guy with 10 restaurants and a great fried chicken recipe won't get much attention from the financial community. But find his company before everyone on Wall Street does, and you could make a killing. That's just one of the reasons that actual stock picking tends to work better than indexing in the small-cap world. This corner of the market still has enough great, undiscovered companies that it's possible for an enterprising money manager to do more than just match an index. "To beat the index you have to do something different -- buy companies that aren't in the index, or weight the sectors and companies differently," says Bryan Olson, vice president at the Charles Schwab Center for Investment Research. "There's much more room to do that in the small-cap market." In this country, outside of the 500 largest stocks, you've got at least 5,000 issues to choose from. And many of these companies are not widely followed by financial professionals. "By going out there, doing the homework and kicking the tires, small-cap managers are able to add more value," says Olson. More value should translate into index-beating returns, provided that a manager can keep trading and other investment costs to a minimum. Those abundant opportunities arguably don't exist in the large-cap market. There, you've got thousands of money managers, analysts and reporters constantly combing over the same 200 stocks. That doesn't mean a stock picker who is buying large-caps can't beat the S&P 500, but it's a lot harder to do. The data definitely back up this theory. Looking at five-year annualized performance ending Dec. 31, 70% of actively managed small-cap funds outperformed the Russell 2000 index, according to Morningstar. Over 10 years, 61% of small-cap funds beat that index. firstname.lastname@example.org .