I am considering shifting the distribution of my portfolio to 70% global all-cap and 30% global small-cap.
There are two assumptions there:
- Small-casp are more risky and
- More risk = better returns.
If we assume that risk = volatility (which is the academic definition of risk and a whole other "can of worms") than you can say that small-caps are more volatile and therefore more risky.
But in order to get advantage of this "More risk = better returns" part of the equation, you have to be able to capture that volatility and that means you will have to be more active with the "more risky" part of your portfolio.
^These are good points. The world is full of risky investments with no rationale for being higher-returning.
I'll add that academics also split the concept of investment risk into 2 parts: systemic and asystemic. Systemic is the risk that the whole market loses value. Asystemic is the risk that something bad happens to a particular investment or company, such as if Ford(F) announces a multi-billion dollar recall, or Facebook(FB) is taxed and regulated out of the EU.
In your diversified global index fund, you have mitigated the risk of any particular misfortune at any particular company blowing up your portfolio. However, your index fund will never beat the index. To beat the index, you would have to make a concentrated bet on particular sectors, countries, companies, etc. and also win that bet. Thus, the adoption of asystemic risk would seem to be required to beat the index. It is a gamble whether the particular asystemic risks you choose will end up benefiting or burning you.
There is one other way to outperform the index, and that is by gambling with options. For example, you could sell covered calls on your index fund and *probably* beat the index by 1% per year, but *possibly* underperform by several percent if the index rallies hard. Technically this is not the adoption of asystemic risk, it is the transfer of systemic risk from one market outcome to another. In other words, selling some of your potential upside in exchange for cash-in-hand.
On the flip side, you could also allocate some funds to buying call options. You could, for example, get 10:1 leverage on most of the upside of the index, while risking only a small percentage of your portfolio - the amount paid for the options. A portfolio with 100 shares of the index fund and 1 call option contract controlling 100 shares of the index fund is similar to a portfolio with 200 shares, but requires a much smaller investment.