In stocks, bigger isn’t always better

Investing in the stock market is risky, and investors who aren’t comfortable with that risk often choose big-name corporate giants they know.

The 30 stocks in the Dow Jones Industrial Average are all behemoths that have been successful for years. And although even the longest-lived companies go through challenges, it’s a lot rarer for them to go out of business than smaller companies you might never even have heard of.

Yet when it comes to investing, reward often comes from being willing to take on risk. Over the past 10 years, investors who’ve been willing to look at smaller companies have seen much stronger returns than those who’ve stuck with the tried-and-true big names more familiar to them. When you look at exchange-traded funds tracking indexes composed of companies of different sizes — SPDR S&P 500 for large companies, SPDR S&P Midcap 400 for midsize companies and SPDR S&P SmallCap 600 for small companies — you can put a number on just how much better smaller stocks have done:

Over shorter periods, these relationships don’t always hold true. Stocks of large companies go in and out of favor compared to their smaller rivals, and there are times when big firms have an edge. The long-term value proposition of the stocks of small companies, however, has borne itself out over time. The right balance of big, midsize and smaller companies can help you enhance your returns while still leaving you comfortable with your portfolio as a whole.