Every investor wants to know the answer to the same question: “Where should I invest now?” And every day the major investment media outlets are prepared to give you the answer. Unfortunately every day and every source has a different answer. What is an investor to do?
The short answer is: It is always time for smaller stocks. The simple fact is that small cap stocks historically dominate their bulkier large cap counterparts. According to Ibbotson Associates, small caps gained 12.6% on average, with large caps lagging at 10.4% annually. That’s not just 2.2% better, it means 21% more profits every year!
But, Even in a Recession?
Especially in a recession! Even more so after. I will be the first to admit that small caps get hit hardest during a severe downturn. Yet when the market bottoms and heads higher, they come roaring back, which more than makes up for any short term headaches.
For example, if you initially bought the Russell 2000 index at the onset of each of the last two recessions and held for 5 years, you would come out well ahead of the large cap indices in each case.
How about this most recent recession? Here is a chart of the last 2 years; the Russell is easily outperforming the large cap-dominated Dow.
Yes, in an overall pullback small caps will fall further than others, but timing the market is a fool’s game. If anyone could accurately pick the few periods per decade that small caps underperform, they would be sitting on a beach somewhere. So it’s best to buy small caps and stick with them to get that 21% extra annual return.
Why Do Small Caps Outperform?
Well, many of you are familiar with terms like beta, or even systematic risk and some variation of a risk-to-reward ratio. The bottom line is that these stocks are in fact riskier assets, but as the saying goes, there is no such thing as a free lunch. Remember that risk just means excess volatility. So if you can handle that form of risk, then you can reap the reward.
Another feather in the cap for these small companies is that they are often more nimble and aggressive with much more propensity for growth than their larger peers. This can allow for exceptional earnings growth that fuels the stock price.
Lastly, small caps have a lot less eyes following the stock. For example, how many analysts are covering IBM? MSFT? GOOG? Dozens. Not to mention the countless other hedge funds and money managers eyeing the larger stocks.
So the smaller companies often fly under the radar for stretches of time. Once they are noticed by these professional investors, the stocks explode higher.
Take Advantage
Small caps continue to outperform larger companies, even on a risk-adjusted basis. So, don’t worry about the timing. Over even a short period of time, your small caps will be leading your portfolio.
That’s why you might want to find out about our new Small Cap Trader service. Since its inception November 2009, it tripled the market and has proven to be the most profitable trading service we have. This success comes from targeting the rare Zacks #1 Ranks that are small caps and have certain proprietary criteria.
You should know that the number of investors in this service is restricted, and only a few spots remain available.
It will close to new members when those spots are taken, or at 11:59 pm Saturday, March 27 – whichever comes first. Either way, it’s only a matter of hours, so I suggest you look into the Small Cap Trader right now.
Best,
Bill Wilton
Bill is an expert on the Zacks Rank stock picking system. You may already know him from his growth stock articles on Zacks.com. He is also the editor of the market-beating Zacks Small Cap Trader.
