I recently returned from a fly-fishing trip with a few mighty men. It was a quick trip – one day, to be exact. We fished on private water in Colorado, and it was an epic day. We caught several fish in a pristine river under bright blue skies.
As the day progressed, we adjusted our flies under the watchful eyes of our guides. As we made the changes and the water warmed up, we caught more fish. As the flies got smaller, the fish got bigger. The tiniest flies produced the best results.
Most investors allocate a hefty portion of their portfolio to large-cap stocks like Apple, Amazon, or Microsoft. These behemoths have produced stellar returns for years, but, at one time, they were small-cap stocks started by a couple of guys with big ideas.
Why should you invest in small-cap stocks? Well, for one, they outperform large companies. For the past year, small companies and micro-caps trounced large-cap stocks. Micro-caps and small-caps are up 59% and 56%, respectively; large-cap stocks have risen 34%.
Since 1995, micro-cap stocks generated an average annual return of 11.7%, small-caps returned 11.3% per year, and large-cap stocks averaged 10.8% per year. A $10,000 investment in micro-caps grew to $189,000 compared to $151,000 for large-caps.
Large companies are household names, and investors are comfortable owning them in their portfolios. The old saying on Wall Street is that you would never get fired for recommending IBM. But what about buying Atkore, Fabrinet, Exponent, or Itron? These names are not well known.
Identifying a diamond in the rough is challenging because we don't know which company will become the next Apple or Microsoft. So, the best way to participate in this category is to buy a mutual fund or ETF. For example, Dimensional Funds small and midcap funds own more than 3,700 companies.
If you want to generate big returns, think small!
He put another parable before them, saying, "The kingdom of heaven is like a grain of mustard seed that a man took and sowed in his field. It is the smallest of all seeds, but when it has grown it is larger than all the garden plants and becomes a tree, so that the birds of the air come and make nests in its branches." ~ Matthew 13:31-32
June 7, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.