Amid the dominance of large-company stocks, investing experts suggest that now is an opportune time to explore smaller firms' stocks due to their relative affordability and historical outperformance.
According to CNBC, the S&P 500, comprising companies with a median market capitalization of over $31 billion, has outperformed the S&P Mid-Cap 400 and S&P Small-Cap 600 over the past five years, with annualized returns of 13.6% compared to 9.7% and 7.7%, respectively.
Investing in Small- And Midsize-Company Stocks
Investors typically favor large-cap stocks, given their inclusion in popular index funds and recognition among traders and analysts. However, financial experts said the current market conditions present an advantageous environment for diversifying into smaller stocks, CNBC reported.
They noted that two key factors support this suggestion: the current relative bargain of smaller stocks and historical evidence of their outperformance over extended periods.
"There's no question it's a fantastic time to be diversifying into small- and mid-caps right now," Greg Marcus, managing director at UBS Private Wealth Management, told CNBC.
Smaller stocks are considered a bargain, trading at approximately 14 times estimated earnings for 2024, a 30% discount compared to the S&P 500. Small- and midsize-company stocks also trade at 19% and 14% discounts, respectively, relative to their historical average price-to-earnings ratio, indicating potential underpricing.
'Partake in the Success of the US Economy'
According to some financial planners, investing in smaller stocks is also relatively attractive. They said diversification into smaller stocks positions investors for potential benefits if valuations revert to their historical means.
An investment in a smaller stock usually pays off when that company grows into a mid-size firm and then turns into a market-leading multinational. Its share price steadily scales up along the way.
"You want to partake in the success of the US economy... That means businesses that are in the US at all parts of that businesses lifecycle - when they're starting out as a smaller size company, up to the big behemoths that we know as household names," Jeremy Straub, founder and CEO of financial advisory Coastal Wealth, told CNBC.
According to Straub, investing in both large and small companies is much better since it would be helpful when different types of firms go in and out of investors' favor in the short term.
"The reason you buy large and small companies is you don't know which ones are going to perform when... Sometimes one or the other will be over- or undervalued. Having investments in each gives you exposure when that asset does well, and you make money," he added.
Join the Conversation