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Investing in small-cap stocks has been touted by many as a reliable way to achieve high returns on investments. However, beware! The small-cap stock fallacy can lead investors into a trap of financial loss. In this article, we’ll explore what small-cap stocks are, the small-cap stock fallacy, and how to avoid it.
Small-cap stocks are shares of companies that have a small market capitalization. Usually, a company is considered small-cap when its market capitalization is between $300 million and $2 billion. Small-cap companies generally have a short operating history, limited resources, and are considered to be in the growth phase. As a result, small-cap stocks are often viewed as an attractive investment opportunity for investors seeking high returns on their investment.
The small-cap stock fallacy is the belief that investing in small-cap stocks is a guaranteed way to achieve high returns on investment. The fallacy is based on the assumption that small-cap companies have a higher potential for growth than their larger counterparts. While this may be true, it’s important to note that investing in small-cap stocks is not without risk. Small-cap companies are more susceptible to economic downturns, and their stock prices can be highly volatile.
Investors who fall for the small-cap stock fallacy usually invest in a small number of companies without proper research or analysis. This is a risky strategy, as it can lead to overexposure to a particular company or sector. Investing in a diversified portfolio of small-cap stocks can help mitigate this risk.
To avoid the small-cap stock fallacy, investors need to approach small-cap investing with caution. Here are some tips that can help:
1. Do your research: Before investing in a small-cap stock, research the company’s finances, management, and competition. Look for companies with a proven track record of growth and profitability.
2. Diversify your portfolio: Avoid overexposure to a particular company or sector by diversifying your portfolio. Invest in a mix of small-cap and large-cap stocks across different sectors.
3. Monitor your investments: Keep a close eye on your investments and regularly review your portfolio. This will help you identify potential risks and opportunities.
In conclusion, small-cap stocks can offer investors an opportunity for high returns on investment, but it’s important to approach this type of investing with caution. The small-cap stock fallacy can lead investors into a trap of financial loss if they don’t do their research and invest in a diversified portfolio. By following the tips outlined in this article, investors can avoid the small-cap stock fallacy and make informed investment decisions.
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I represent stocks in a market capitalization normalized way, 70 large, 25 medium and 5 small. But I do it mostly with different dedicated indexes for medium and small because logarithmic error in tracking has to eat away potentially all upside from something like VT/ITOT, there is incentive to trade less and there isn't enough money in the world or shares cheap enough in small and micro caps to justify rebalancing heavily as should when you represent that many orders of magnitude
This is an interesting take because I was under the impression that small cap growth stocks outperform and have been adding to my OGGFX position since it has been down so much over the past year or so. I might go back through and research this some more. Always appreciate the insight, even if it challenges what I thought was right! If I come to the same conclusion, I'd rather learn that now vs 30 years from now haha.
I will say that Dustin at Jazz is a big small cap guy, so I'd be interested to see you guys discuss this sometime!
Best wishes
I have 1.60% in US small cap growth funds and 1.62% in US small cap Value funds. 1.6% in foreign small/mid. More % in Large and mid caps growth and value funds comprised of a both US and foreign. All part of diversification.
I picked up some small cap funds but its to offset my large cap funds that are in VPMAX. I was watching this video and my Chiweenie starting licking the touchpad and closed the browser.
Diversity must include fixed income
In the new NWO for the foreseeable future if you're close to or retired.
In defense of Paul Merriman, he advocates for Small Cap Value stock indexes, not small cap stock indexes. If you use the asset class part of Portfolio Visualizer, you will see that Small Cap Value outperforms Large cap even of the timeframe that you show in your videos.
Josh, I'm amazed that you only have 76k subscribers. I would have thought it much higher.
Most other financial advisors on YouTube just keep regurgitating the same market news, but you keep mixing it up. It's not everyday, but quite often I pickup a nugget of gold wisdom from you.
People, if you aren't subscribed, hit that subscribe button.
The point is diversification to protect from massive drawdowns. There was a point in the 00s (2ks) where s&p was not doing well. Either way, investors if they can, should diversify.