Do You Have Small Company Stocks in Your Investment Portfolio?

I recently reviewed a prospect’s investment portfolio.

She had a lot of different mutual funds in several different accounts. A mutual fund is a convenient way to buy a “basket” of many stocks or bonds. Because she had a lot of funds in a lot of accounts she thought she was well diversified, but she was not.

Nearly all of her holdings were US “large cap” mutual funds. Large cap means large company. “Cap” is short for “Capitalization” which is the dollar value of a company’s existing stock shares. Examples of large cap companies are Apple, Microsoft, Google, Johnson & Johnson – companies we’ve all heard of and may or may not love.

The definition of “small” varies, but generally it is a company with value of ≈$300 million to $2 billion. So we are not talking about Bill and Bob’s Backyard Widgets.

Examples of small company stocks include regional banks such as Bancorp South and the Bank of Hawaii.

Companies like Coherent, Inc. “the world’s leading supplier of laser solutions” in Santa Clara, CA.

Or Knight Transportation a “truckload motor shipping carrier” in Phoenix, Arizona.

I recommend that nearly all investors own some “small cap” or small company shares (in the form of a mutual fund). Why do I recommend this? Well, as Willie Sutton said when asked why he robbed banks – because that is where the money is.

Over time small cap stocks have out-performed large cap stocks