Over the past few weeks, I’ve been reflecting on a subtle but possibly significant structural shift in the investment landscape: the idea that many of the best-performing small-cap companies may no longer enter the public market at all.
This idea was raised in a comment by William Bengen on LinkedIn — yes, the William Bengen who introduced the famous “4% rule.” In our brief but meaningful exchange, he noted:
“Small-cap stocks have underperformed their long-term investment returns for some years now. Part of the explanation may be structural: the best small-caps may now be bought by VC funds, and are not available for public investment, as through mutual funds. Markets change. Volatility in the past was more than offset by higher returns, but this may no longer be the case.”
This observation struck a chord. If structural access to future small-cap winners is changing, it raises real questions for long-term DIY investors. So I replied with my own thoughts:
“This is a valuable point, William. The idea that top-performing small caps are increasingly bypassing public markets — going straight to VC or private equity — could have serious implications for long-term asset allocation. That said, I haven’t seen clear data showing private funds consistently deliver better net returns than public markets, especially after fees and adjusting for liquidity. It feels like some of the best growth happens in private markets, but that doesn’t necessarily translate to superior returns for most investors. I’d be curious to hear your thoughts on how this structural shift should influence small-cap strategies for DIY investors who can’t access private markets. Do we need to rethink the small-cap premium as a reliable future source of outperformance?”
He responded simply:
“We might have to.”
A Respectful Middle Ground
While Bengen remains open to rethinking the small-cap premium, Paul Merriman — another retirement investing luminary — continues to advocate for a tilt toward small-cap value through funds like AVUV. I admire Paul’s conviction and track record, and I’ve personally allocated 30% of my Roth conversion funds into AVUV. I’ve also added more through new contributions, though it still makes up about 5% of my overall portfolio. I’m gradually building it up, with a target of 10–20%, acknowledging that total market funds also have a small-cap component.
This seems to reflect my overall approach: one foot in evidence-based optimism, one foot grounded in flexibility.
Connecting with Legends
I recently connected with William Bengen on LinkedIn, which I consider an honor. Engaging directly with someone who fundamentally changed retirement planning has deepened my perspective. I may not have a formal credential in finance, but my thinking — like my book — is grounded in independent logic and lifelong learning.
Bengen’s insight prompted me to challenge assumptions. Merriman’s consistency has shown me the value of holding steady. Neither seems wrong — just differently weighted. And I don’t need one to “win” for my plan to succeed. I just need a resilient structure with thoughtful diversification and realistic expectations.
Final Reflection
As long as I stay committed to the plan, any “alpha” is just icing on the cake. Whether the small-cap premium resurges or private markets shift the opportunity set, I’ll keep refining — thoughtfully, not reactively.
No regrets. Just the joy of thinking, growing, and staying invested.