Unlike 13 years ago, when we really weren't sure how the computers would react to the change in the millennium, the world won't change too dramatically when we wake up on January 1. Instead, this is just a chapter in a larger drama. The story started years ago and will continue to play out for years. The fact is that the United States must readjust its federal spending habits after a decade of funding wars and massive fiscal spending geared toward preventing a second Great Depression.
My point isn't to debate the near-term or even long-term path we will take as we continue to struggle with this massive headwind. Rather, my goal is to keep things in perspective and suggest a prudent tactical portfolio adjustment: Up your exposure to Small Caps.
Before I lay out my case for shifting into smaller stocks, let's take a quick look at the recent history of the Russell 2000 (IWM) and the S&P 500 (SPY). I am breaking the past 18 months into three different periods. First, let's take a look at the awful Q3-2011:
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