“The best time to buy large cap stocks is at the beginning of a growth boom.”

“The race for market leadership favors large companies. The winners will dominate mainstream markets for decades.”

Buying large company (”large cap”) stocks is an investment in the biggest and most well established companies doing business today. These are proven, dependable performers. Some, such as Coca-Cola and General Motors, have been around for nearly a century. Others, such as Intel, Microsoft, Cisco, Charles Schwab and Starbucks, are the new giants of the economy whose products and services moved quickly beyond small niche markets into the mainstream.

Conventional asset allocation theory tells us always to invest a percentage of our portfolio in large cap stocks regardless of the health of the economy. The truth is that large cap stocks only are a good investment during extended boom periods, like 1902 to 1929, 1942 to 1968, and 1982 to 2008. Maintaining a balance of large and small cap stocks in your portfolio, irrespective of the distinct economic seasons I have identified, is a disastrous way to diversify.

Historical data clearly indicates that the time to buy large cap stocks is at the beginning of a Growth Boom , which is second season of the 80-year cycle. For example, large company stocks seemed to trounce small company stocks in the Growth Boom of the Roaring 20s. We have data for only the last four years, from 1926 through 1929, but the growth of large cap stocks in that period averaged 19.8%. In the more recent boom period that began in 1982, the data again shows a huge gain in large cap stocks. In the fourteen-year period from 1984 through 1996 such stocks increased in value by 340.7%, more than double the increase in small cap stocks.

What these statistics demonstrate is that large cap stocks predictably boom on a 46-47 year lag to the birth index. This lag coincides with two events, the peak spending years of the innovative generation and the mainstreaming of the new products they introduce that fosters a race for market leadership. Large companies competing for the top spots clearly have the edge, and those who win this race will continue to dominate these mainstream markets for years to come. These are the companies to invest in.

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“I recommend divesting yourself of large cap stocks before the next depression era or “Deflationary Shakeout” begins, around late 2008 to 2010.”

A second economic season that favors large cap stocks is the Maturity Boom. It coincides with the peak spending cycle of the conformist generation, which in our recent history was the Bob Hope generation. Their Maturity Boom occurred from 1942 through 1968, on a 44-year lag to the birth index. (The shorter lag is due to the fact that the Bob Hope generation married, had children and reached their spending peak a bit earlier than the baby boom generation, which is on a 46-year lag.) The next Maturity Boom will begin around 2023, when the echo baby boomers move into their peak spending cycle.

The seasons that don’t favor investment in large cap stocks are Inflation and Innovation , and the Deflationary Shakeout , which is a depression era. For example, in the last depression era between 1930 and 1942, large caps lost 80% of their value. Likewise, in the last inflationary season between 1968 and 1982, large caps lost 70% of their value when adjusted for inflation. In the deflationary season, you should consider investing in corporate bonds and small cap stocks. In the inflationary season your portfolio should emphasize small cap stocks and real estate.