USA TODAY International Edition
Small stocks can add up to big gains
Here’s why they should be part of your portfolio
If there aren’t any small stocks in your investment portfolio or 401(k), you’re missing out on big gains.
While big stocks such as Apple and big indexes such as the Dow Jones industrial average get most of the attention from investors, it’s the shares of little companies without big reputations that are the huge performers this year.
Never heard of satellite service firm Intelsat, nursing-home provider Genesis Healthcare and taser-maker Axon Enterprise? These off-the-radar companies are just a few of the winners in the Russell 2000 index — which includes stocks of smaller companies with an average market value of $2.5 billion. The index reached a record high Wednesday and is up more than 9% this year. That compares with a gain of less than 4% for the Standard & Poor’s 500 index.
The better performance of smaller stocks in 2018 follows a tough 2017, when their returns trailed big stocks by more than six percentage points. The change in fortune is a reminder to investors that devoting a portion of their portfolio to tiny companies is a good way to spread around their holdings.
Here are reasons why small-company stocks should be a part of your investment portfolio:
1. Boosts diversification
The more your money is placed in different types of investment and assets the less risky your portfolio becomes. It also boosts your odds of owning something that is rising in value. Small-company stocks also have a history of posting better returns than other investments over the long term, especially the closely followed S&P 500.
2. Limits exposure to foreign turmoil
The negative fallout of global trade conflicts and tariffs is more an issue for big companies that do a lot of business abroad. Small companies only get about 10% to 20% of their sales from overseas vs. more than 43% for S&P 500 companies.
3. Benefits from Trump tax cuts
President Trump’s record-size tax cuts to corporations was designed to benefit American companies, and U.S.-based firms that get the bulk of their sales at home were big beneficiaries. In general, every dollar that doesn’t go to paying taxes goes straight to the bottom line.
4. Skirts strong dollar
Since the market low in February, the U.S. dollar has risen 5.4% vs. a basket of foreign currencies, due mainly to rising interest rates in the U.S. and weaker growth abroad. While a rising buck is good for tourists, as their dollars will have more purchasing power overseas, its crimps sales for big U.S. companies whose products become more expensive for foreign buyers.