Question:
I’m interested in making my portfolio a mix of market caps more like my 401k which had better performance than my mostly large-cap brokerage account. What do you think? I’m 45.
Answer:
At 45, presumably, you have 20 or more years until retirement, so if you’re the type of investor that can stomach a little more volatility with your investments, we don’t see a problem with a more aggressive diversification.
Keep in mind, small- and mid-cap stocks are more volatile, more expensive, and have been leading the current five-year bull market for some time now. Small caps are up nearly 300%, mid-caps about 270% and large caps are up about 210%. Small and mid-cap stocks tend to perform better in economic recoveries and should have more room to grow their earnings. As Wayne Gretzky said, “Skate to where the puck is going, not where it is.”
We warn you about trying to chase performance. Oftentimes, smaller companies are more nimble, meaning they can more easily curb production or increase it depending on the demand they see from their customers. It is difficult for companies like Procter & Gamble (NYSE: PG), Johnson & Johnson (NYSE: JNJ) or a Toyota Motor Corp. (NYSE: TM), to respond quickly to market conditions because they have plants all over the world.
If you are going to invest in small- and mid-cap companies, we recommend you consider using an exchange-traded fund or mutual fund to get the great diversification that is more likely to yield you the return you are seeking. It is considerably easier to create a diversified portfolio using 10 to 15 Large-Cap stocks, as Large Caps are often diversified within the company as far as operations and geographic reach are concerned.
If you are interested in ETFs, we recommend iShares Core S&P Mid Cap ETF (NYSEARCA: IJH), which tracks the Standard & Poor’s Midcap 400 Index, and the iShares S&P SmallCap 600 Index ETF (NYSEARCA: IJR), which tracks the Standard & Poor’s SmallCap 600 Index. Both charge relatively low fees.
At Henssler Financial we believe you should Live Ready, and that includes understanding your portfolio diversification. If you have questions regarding your stock holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
