Small-cap stocks appeal to some investors because of their potential for strong growth. But are you in the right position to invest in them?
What are small-cap stocks? The market capitalization of a company is its stock price times the number of shares it has out- standing. Small-cap stocks typically include companies with market capitalizations of $300 million to $2 billion (versus $2 billion to $10 billion for mid-cap stocks and greater than $10 billion for large-cap stocks).
Why consider small-cap stocks? Small-cap stocks typically have greater growth potential than larger-cap stocks, for a number of reasons. Generally speaking, many believe smaller companies may be more nimble than larger companies, so decisions about new products and services, and solutions to problems, can be made and implemented quickly. This helps smaller companies perform well at critical times.
When do small-cap stocks perform well? Conventional wisdom holds that small-cap stocks can perform better than larger-cap stocks when markets have been down and are improving. In- deed, some economists consider small-cap stocks a barometer for the overall health of the US economy. Small-cap stocks also tend to perform well in rising-interest-rate environments and today, we are in a rising-interest-rate environment.
Is the time right for small-cap stocks? Trying to time the market is not usually advisable; it is generally better to choose an appropriate asset allocation for your risk tolerance and financial goals and stay the course. However, if you and your advisor believe they are right for your portfolio, you may decide now’s the time to add some small-cap stocks.
Note: This material has been prepared for informational purposes only, and is not intended to provide financial advice for your particular situation.
Yann Kostic, MBA and Tom Zachystal, CFP, are Presidents of their respective Assets Management firms, both US-Registered Investment Advisors (RIA). Tom is the San Francisco Financial Planners’ Association President. Tom and Yann cater to US ex- pats in Mexico and worldwide. Comments, questions or to request his newsletter, “News you can use” contact him at firstname.lastname@example.org, in the US at (321) 574- 1521 or in Mexico, (376) 106-1613.