IS IT TIME TO BUY SMALL-CAP STOCKS?

by Craig Erwin, Ph.D.

Photo by Valdemaras D. on Pexels.com

Small-cap stocks (shares of small companies) went on a tear at the end of 2023. Although the Russell 2000, a small-cap index, showed few signs of life earlier in 2023, it gained 44.65% in December, 2023, according to Microsoft Bing. Large-caps have outperformed small-caps for years, especially large-cap tech stocks.

Thanks to what’s known as the “January effect”, small-cap stocks tend to perform well in January, with the Russell 2000 averaging a 1.4% gain in January since 1979, according to Nasdaq.com. On top of that, small-cap stocks have historically outperformed large-cap stocks over the long term, according to the American Association of Individual Investors. In recent years, though, as Andy Hyer, of Nasdaq Dorsey Wright, points out, small-caps have underperformed.

In 2023 the S&P 500 gained 24% while the Russell 2000 gained 15.1%. according to Investopedia.com. Through February 12th, 2024, the Russell 2000 has gained 2.53%. year to date (YTD), according to the Wall Street Journal. No one knows for sure if small-caps will perform well or poorly either now or in the future. That means it’s wise to diversify, as always. You may well get burned if you just buy the hottest stocks. They often go cold as soon as you buy them.

Should you invest in small-caps or avoid them? Given their underperformance in recent years, it might seem wise to buy only large-caps, or perhaps only large-cap tech stocks like Nvidia and Microsoft. But it is very difficult to predict which companies will perform best in the future. So, diversify; buy them all, big, small, and medium-sized, from different industries, as well as tech stocks and non-tech stocks. In other words, buy indexes, like the S&P 500 and the Russell 2000. Peter Lynch, one of the most successful investors of all time, is said to have never met a stock he didn’t like. Now that’s diversification.

Do you own stocks of all shapes and sizes? Do you think your portfolio is sufficiently diversified?

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