Small cap stocks, or stocks whose market cap fall between $300 million and $2 billion, should be a part of any well-balanced portfolio.
For one, small-cap stocks offer great historical returns.
Small-cap stocks have a history of outperforming large-caps, returning an average gain of 12% a year over the last 90 years, as compared to a 10% annualized gain on the S&P 500, as reported by Market Watch.
And, according to U.S. News & World Report:
“One advantage of small-cap stocks is these companies can outperform large-cap stocks. Recent data published in the “Stocks, Bonds, Bills, Inflation (SBBI) Yearbook” show that small-cap stocks returned 12.1 percent annually between 1926 and 2017 compared with large-cap stocks, which returned 10.2 percent annually during the same period.”
Two, small cap stocks can offer better ground floor opportunities
Institutions, for example, don’t often pay much attention and can’t invest in smaller companies without driving up the price. This offers the average investor a good amount of opportunity, especially if we find one with a bright future, solid revenue and earnings growth. For example, years ago, we spotted ACADIA Pharmaceuticals (ACAD) at less than $2 a share. It was ignored for quite some time. But as the benefits of its Parkinson’s disease Psychosis (PDP) came to light with FDA approval, the one-time unknown small cap ran above $50 a share.
Three, small caps help you diversify your portfolio.
We all know the saying ‘don’t put all your eggs in one basket’, but it’s essential to apply this rule when investing. Spreading your money across multiple assets means you won’t be depending too heavily on one kind of investment. If one of them performs badly, hopefully, some of your other investments might make up for these losses.
A diversified portfolio can include large and small companies, different industries or sectors, U.S. and overseas securities, bonds as well as cash.