Leafing through the October issue of the AAII Journal -- the magazine for members of the American Association of Individual Investors -- I was struck by the article that discussed the returns of the organization's Model Shadow Stock Portfolio of micro-cap stocks. This category consists of a selection of the smallest companies whose shares are sold on major exchanges.

The cumulative return of the model since 1993 has been about 2,700 percent (an 18 percent compound annual return). By comparison, the S&P 500 index is up about 500 percent (8.3 percent per year) and the Vanguard small cap index is has gained a total of about 700 percent (10.22 percent per year).

Bear in mind, this means that $1,000 invested in the Shadow Stock Portfolio back in 1993 is now worth $27,000, and that got my attention.

The "Shadow" of the Shadow Stock Portfolio refers to the fact that the stocks chosen are in the shadow of Wall Street and not followed or recognized by mainstream analysts. The AAII editors tend to sell shares when they come out of the shadows and their prices go up. To participate in this exercise, an AAII member has to actually buy the shares on the list. They are monitored and occasionally exchanged just once a quarter. A strict methodology determines who gets added, who stays and who gets sold. Annual turnover and costs are kept very low.

Before getting all excited about managing a portfolio of micro-cap stocks myself, I turned to my well-worn copy of John Spooner's seminal work, "Do You Want to Make Money or Would You Rather Fool Around?" -- for a reality check. He points out that he asks that question of every new potential client, and some actually say, "I've made plenty of money (somewhere other than the market, presumably) and I'd rather fool around and have some fun."

Quite a few people these days may be feeling the same way as they witness their rising home equity coupled with an astounding rise in their retirement account values.

If this sounds like you, and you feel like fooling around while expending little or no effort, I may have just the thing for you. Some micro-cap mutual funds are up about 45 percent year to date. While it is now closed to new investors, the only fund that has been around since 1993 that I could compare with the AAII Model portfolio is the Bridgeway Ultra-Small Company Fund (BRUSX). Since inception in 1994, its average annual rate of return has been 16.4 percent per year, which means that $100 would have compounded to about $2,000 over the same 20-year period.

If an investor could have avoided Bridgeway's annual expense ratio of about 1 percent, the cumulative equivalent would have been $2,400, which just goes to show what reducing investment expenses can do for returns. For what it is obviously worth, there is no expense ratio for following the AAII shadow stock model yourself.

Available micro-cap funds include those run by Wasatch (WAMVX), Oberweis (OBMCX) and Buffalo (BUFOX). Longer-term rates of return vary all over the map, and since these funds were all started at different times it is difficult to compare their results. Buffalo and Oberweis, however, are both up 46 percent year to date.

It stands to reason that the volatility inherent in this investment category would generate higher long-term returns thanks to what is termed the "risk premium." The invisible hand of economic forces rewards those who can stomach more risk, but you need patience to harness this particular investment engine. While regular small cap funds in general tend to beat market averages by 2 percent, it stands to reason that micro-caps would do even better.

Meanwhile, a membership in AAII costs just $29 per year. The vast benefits of membership range from the stock advice mentioned here to local meetings and seminars for people wanting to learn about investing. Consider a membership for a child or grandchild who shows an interest in stocks. This nonprofit organization is the best resource I can think of for anyone who takes their money seriously.

Stephen J. Butler is CEO of Pension Dynamics. Contact him at 925-956-0505, ext. 228 or sbutler@pensiondynamics.com.