And with the economy continuing to strengthen in housing, manufacturing, and retail sales, small-caps will continue to have good upside potential.
The chart of the Russell 2000 below shows the upward break from the bullish ascending triangle. There’s some stalling and some potential for a relapse to back below 900, based on my technical analysis.
Chart courtesy of www.StockCharts.com
As we move forward, a lot of what happens to small-caps will be dependent on the ongoing strength of the economic recovery.
The key to investing in small-cap stocks is diversification and risk management.
Simply the risk is much higher when buying small-cap stocks. For instance, the emergence of bad news could drive small-cap stocks down 40%, while for a large-cap such a The Procter & Gamble Company (NYSE/PG), we would likely only see a decline of a few percentage points.
You should be sure to never load up on a sector and diversify across market caps and risk instead. In this way, you can achieve higher overall portfolio returns by adding small-cap stocks.
Add too many small-cap stocks, and you are vulnerable to excess selling if the market turns.
So in spite of the current pressure on small-cap stocks, I favor smaller companies for long-term growth, as the valuations tend to be more attractive and worth a look for aggressive investors.
And while the buying of large-cap stocks will always be an integral part of your portfolio, I suggest that you add some small-cap stocks for added overall portfolio returns.
Take the opportunity to buy on dips, as we have seen with small-cap stocks.
Also, be careful; the risk heightens if the economy turns against us, which would leave small-cap stocks at risk.
Of course, no reward is without risk, and in my view, small-cap stocks are still attractive.
Why It’d Be Foolish to Give Up on Small-Caps was last modified: April 26th, 2013 by George Leong, B.Comm.
George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »
Forecasts Aug. 29, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 29, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)