The CRSP is not a mutual fund, it’s a passive index. The CRSP database has no more “survivor bias” than the S&P 500 or the Wilshire 5000 indices.
Interesting.
Of course over the past 10 years the smallest 10% of publicly traded stocks (CRSP-10) was the poorest performing decile, over the last 5 years it ranked number 5.
Forbes has some comments regarding the limitations of investing in the CRSP-10 that should be noted.
Now that writer still likes having micro-cap exposure and their preferred fund to use is that Bridgeway Ultra Small Company Market Fund Surreal linked to. Using Google Finance and comparing its performance to the S&P 500 index over the last ten years has it *down *over 22% with the S&P index up 70%. Of course start in January 2000 and it outperforms the S&P 500.
Not sure what to make of that.
I think it’s prudent to point out that when you talk about “index funds”, there are a lot of such funds out there. They will generally offer exposures to different parts of the market. I find it prudent as a beginning investor to hold a broad range of index funds that cover the entire market of equity securities available to invest in. The key to making greater risk-adjusted returns is adding securities to your portfolio that have little correlation to the ones already there, assuming that the risk-adjusted return is the same as your portfolio, and perhaps even lower if you find something that’s vastly uncorrelated. Doing this along with periodic rebalancing so that your equity spread stays about the same in all categories allows you to kinda sorta “time the market”, in the sense that you’ll tend to sell funds whose components have risen recently and buy ones whose components fell recently, without actually individually timing anything at all. (Of course, since I’m just starting out, I’m putting in such a large fraction of what’s already there the “rebalancing” is merely deciding where to put new money that I’m saving.) As you become more risk adverse as you approach your ultimate investing goal (presumably retirement), you then slowly offload some equities for more stable investments.
Thus, there are times that people are buying and selling on the market not because they think a particular stock/fund will not rise in value, but because they believe that the risk-adjusted return of that security is not high enough, or it is too correlated with the rest of their portfolio. When they sell, they may “lose” further appreciation of that stock, but gain from the reinvestment of the funds elsewhere. And as your draw down on your stocks and ultimately your safer investment, you’re not losing if you need the money now. Different people have different utility curves for money, particularly when it comes to ones with different patterns of cash flow. One won’t value a $20 a quarter dividend as much as the $1000 one might be able to get right now if one is not going to be around for the 12+ years it takes to make the dividends add up, while another investor has $1000 burning a whole in his pocket and wants to invest it. Neither of them lose by making the trade.
I don’t know the answer to LSLGuy’s question but …
… I don’t think this is phrased correctly. At a minimum, the data assume that these portfolios are re-balanced every Dec 31. Things could be even worse: new additions at NYSE are generally thriving companies — did the statistician use a January purchase on a stock listed at NYSE in July?
Note also that, in the linked table, 1st decile stocks (6.80%) outperform 10th decile (6.59%) in the “10 years” column.
Survivorship bias is certainly a major issue in many such statistics. As an extreme example, consider just the meme that the U.S. stock market “always” outperforms gold in the long run. This meme doesn’t work if you replace “U.S.” with “Germany.” 
The smaller the company is, the less likely it is to be correlated with the overall market, as they will by the nature of their size be dealing in a very niche market, either geographically or culturally. Sure, it’ll correlate somewhat with the overall market, but it would be subject far more to factors that are washed out with larger capitalization stocks. That a “large” basket of them has failed to produce a positive return says more about the ability of small companies to find their niche now that the Internet has been around for a couple decades and there have been multiple waves of start-ups that have either succeeded or crashed and burned. If you take it back to closer to the dawn of the internet age, then you’ll have caught more of the early winners.
That’s my take on it at least for those two data points.
Also, I saw on my brokerage today a post about how, while small cap stocks do have an overall higher rate of return than large cap, almost the entirety of that advantage comes from gains made in the first year of the growth phase of the business cycle. They tend to do worse in recessions and barely outperform during mature growth markets, like the one we’re likely in now.
Wrong. Per Morningstar’s data that fund has had an annualized return of 6.12% over the past 10 years:
http://quicktake.morningstar.com/syndication/trailreturn.aspx?cn=GLG117&symbol=BRSIX
And using the S&P 500 index (which is basically a megacap fund) as a benchmark for a fund that only invests in the tiniest of microcap stocks is pretty silly.
There is no survivorship bias in these indices. They periodically rebalance their constituent stocks according to certain inclusion criteria. Failing companies will drop out of the index. However, they always drop out at market price on the rebalance date, and the replacement companies at are added at market price. On rare occasions a company may go completely bust before it is kicked out of the index — if so, the index does reflect the price drop all the way to zero.
So you can track the index with a real portfolio - as a vast number of index funds now do. But you do have to actively adjust your portfolio each time the index constituents change. This can create large price drops and spikes for companies leaving or entering the indices. However, this process is so well understood that people now anticipate these changes well ahead of time, smoothing things out somewhat.
Sigh.
First not “wrong” (just click the link and click 10 years) - and neither is Morningstar (which rates it as below average return, average, and below average, in the 3, 5, and 10 year time frames respectively with above average risk in two the three periods): Google Finance is a comparison of the price performances and Morningstar reports the annualized return (for which the S&P500 as a proxy of the market has also outperformed).
Second is that I thought the claim was
Comparing the results of that strategy against the S&P500 as a representative approach of buying “the market itself” is a silly way to see if that claim is true? Now that is “wrong.” 
Sticking with Morningstar that fund has underperformed the S&P500 in all of the 3, 5, and 10 year timeframes.
Just a simple fact check. It has produced higher returns than the market itself, just not in the last three, five, or ten years … but go back far enough and it has.
You specifically said “comparing its performance to the S&P 500 index over the last ten years has it down over 22%” when, in fact, the fund is up over 80% over the past ten years. And comparing the performance of a microcap fund to the S&P 500 is just silly. There is literally no overlap whatsoever in the stocks that the two funds hold. Typically the CRSP deciles 9&10 are used as a benchmark for microcap funds.
If anyone is interested, there are plenty of perfectly valid reasons to be wary of microcap funds, but none of the reasons offered here so far (the index itself has “survivor bias”, new additions to the NYSE are “thriving” companies that affect the results, the fund has underperformed some other segment of the market over the past 5 years, the fund has underperformed the S&P 500 over some time frame, etc.) are compelling.
Good info. Thank you. But a follow-on question if I may.
If an investor (or fund manager) wants to track the index exactly he/she must sell the failing company and buy the up-and-coming growing company as they leave and enter the index. Is there any assurance (by design of the index) that that can be done dollar for dollar?
IOW is the following scenario real or imaginary: The best price I can get for my index-appropriate quantity of shares in FAIL yields me just $10,000. Meantime, to buy an index-appropriate quantity of GROW I need to come up with $30,000. Ignoring “day-of” price gyrations.
This goes to my point, wherein “survivorship bias” may not quite be the correct term of art. Yes, a real portfolio can track the index in the sense of owning the same stuff in the same percentages. And by buying or selling as needed when the index constituents change. But if holding the correct portfolio mix during changes in index constituents requires additional capital injections, then an actual investor will trail the returns of the index whether or not he/she injects the extra capital.
Which, if true, would in turn have the result that the amount of performance trail will be small for low-churn indexes and higher for high-churn indexes.
Am I on the right track here or full of it? I sure don’t know.
This isn’t exactly answering the questions you have, but it’ll put the things you wonder about in perspective:
Here’s what my S&P 500 index fund says: “The investment seeks to track the total return of the S&P 500® Index. The fund generally invests at least 80% of its net assets in stocks that are included in the S&P 500® Index. It generally gives the same weight to a given stock as the index does. The fund may invest in derivatives, principally futures contracts, and lend its securities to minimize the gap in performance that naturally exists between any index fund and its corresponding index”.
Some days, the fund is up .01% more than the S&P 500. Today, it was up .01% less. But it’s always in that range as far as I remember. It mostly tracks how well the index does, but the managers know that it can’t be perfect.