Should You Make Small-Cap Stocks a Part of Your Portfolio?, #171
Does recent stock market performance have you itching for a change-up? Have you considered small-cap stocks or small-cap stock funds? On this episode, I’m taking a look at constructing a diversified portfolio and if investing in small-cap stocks is right for you.
You will want to hear this episode if you are interested in...
Understanding small and large-cap stocks [1:18]
Evaluating stock market performance to construct your portfolio [3:27]
Investment strategies for small-cap stocks [5:19]
The pros and cons of small-cap stocks
As the stock market recovers from a tough August and July, now is a good time to explore small-cap stocks. Large-cap stocks, such as those in the S&P 500 and the NASDAQ, have performed well this year. However, their growth potential is limited due to their size. Small-cap stocks, with market capitalizations of around $2 billion, offer the promise of greater growth combined with higher volatility and risk.
While giants like Apple can weather economic storms thanks to diversification, smaller companies may struggle if they rely on a single product or revenue stream. So, diversifying your portfolio with small-cap stocks can be a strategy to consider. You just have to balance the allure of growth with risk awareness in today's dynamic financial landscape.
The historical performance of small-cap vs large-cap stocks
Over the past century, small-cap stocks have consistently outperformed their larger counterparts. Small-caps have an average annual return of 11.57% compared to 9.57% for large-caps until the end of 2022. However, this outperformance has come with more significant fluctuations in returns. Looking at the most recent decade, small caps earned 10% while large caps surged by 21.62% in the last year. Over five years, the S&P 500 delivered 10% annually, while the S&P 600 averaged 3.7%. Over the past decade, the S&P 500 boasted an average return of 12%, while the S&P 600 averaged 8%.
This recent underperformance has led to an undervaluation of small-cap stocks, currently trading at a P/E ratio of 13 compared to the S&P 500's 21. If small-cap stocks regain fair valuation, there's a growth opportunity that could potentially outshine their larger counterparts. Although market dynamics may not always follow historical patterns. Listen to this episode for more on making small-cap stocks a part of your portfolio!
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