Because small-cap stocks have done so well over the past year, many are wondering if it's time to shift gears and allocate more money to larger companies. That type of thinking, however, can lead to subpar returns.
For the 12 months ended March 31, the S&P 500 gained 35%, but the S&P SmallCap 600 rocketed ahead 56%. Perhaps, the thinking goes, these little guys are due for a "breather," while laggards such as General Electric
That may generally be true, but it's difficult to profit off such tendencies and generalities. First, the trend may not hold true this time around. And if it does, there's no way to predict the timing. It may take another few months or even a year or two -- or longer -- before large caps significantly outperform small companies again. In short, nobody can predict the short-term direction of the market or any of its subsets.
If you've got years of investing ahead of you, it's probably a good idea to include some small caps in your portfolio. Be prepared for volatility: Over the past 15 years, small caps in aggregate have fallen more than 30% on five separate occasions. But they've also outperformed the general market over the past five- and 25-year periods.
If you'd like to become more efficient in small-cap investing, consider enhancing your education with a free trial to Tom Gardner's Hidden Gems newsletter. His selections have, on average, outperformed the S&P 500 47% to 8% since the service began last summer -- and his guest analysts have averaged 32%.
Rex Moore helps Tom Gardner dig for gems. He owns no companies mentioned here.