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Fund Spy

Buck the Trend and Stick with Strong Small-Cap Funds

Some of the most-redeemed small-cap offerings are long-term winners.

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If your friends jumped off a bridge, would you do it too?

It's been rough going for the markets since mid-July. Many indexes have recently reached "correction" status; that is, they've fallen 10% from their respective peaks. Financial stocks have been hit the hardest, but U.S. small-cap stocks certainly haven't had it easy. While the S&P 500 has fallen 8.36% since July 19, the Russell 2000 has dropped 12.75%. As the markets have been volatile, some investors have reacted: More than $5 billion has come out of small-cap funds in the second half of 2007.

We took a look at the small-cap funds that investors have been selling--and buying--since July. It should go without saying that what you, dear long-term investors, do with your small-cap funds depends largely on the rest of your portfolio. Small caps have been big winners over the past five or so years--if they've grown to be too large of a stake, it makes sense to trim your holdings. On the other hand, corrections can present opportunities. Should you succumb to peer pressure? Read on.

Bridget B. Hughes does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.