What small cap stocks should I buy?
It’s the question that causes level-headed, long-term-thinking financial advisors to take a step back.
That question carries a lot of underlying meaning that’s not necessarily positive for investors. It’s associated with words like “gamble,” “risk,” and “speculation” – dangerous words but words that attract investors nonetheless.
So when Cheryl Cason of Fox Business asked Mark Matson if smaller stocks were “a better bet” for investors, Mark Matson took a step back by saying, “I don’t ever want investors speculating with their money. What I want them to do is build a prudent portfolio, and part of that is adding diversification.”
… and part of that diversification is adding small cap stocks.
Matson, an advisor who’s well-reviewed by his clients and colleagues, elaborates on this in the video below.
Cason’s question came after she announced that total returns for small stocks were about 40% higher than S&P 500 returns from 2003 to 2013.
After taking a step back, Matson took a step forward back to the question Cason asked.
He said that small cap stocks are a good bet – or, at least, a good piece of a diversified investment strategy – because they have a very low correlation with large stocks. Which means that if a group of larger stocks you own isn’t doing that well, more than likely, a group of smaller stocks you own is.
This circles back to Matson’s 2014 investment strategy that has worked favorably for his top clients at Matson Money, Inc.
- Own equities
This is a strategy that Matson weaved into his response to Cason’s final “risky” question:
If someone wants to make some risky bets, should they invest 5% of their portfolio, 10% of their portfolio, or a different percentage in small cap stocks?
With the proven success of equities on his mind, Matson responded by saying, “Three out of every four years, equities are up. And, in general, when they’re up, they’re up 21%. That means that only one out of every four years they’re down, and, on average, they’re only down 13%.”
What Matson is alluding to here is that if you’re compelled to take risk as part of a serious strategy, DON’T. Avoiding risks as much as possible is the only smart way to build a sound portfolio. Major risks play no part.
But this doesn’t mean 5%, 10%, or even 40% of your portfolio can’t be allocated to small cap stocks … in terms of equities of course.
“Most investors are too allocated to large U.S. stocks,” said Matson. “So they can put 10, 20, 30 percent – even up to 40 percent – in [small cap stocks] and not only increase their expected return, but decrease their overall volatility.”
Own equities. Diversify. Rebalance.
That’s the name of the game for 2014 in regard to both small stocks and overall investment strategies.