Diversifying Your Portfolio with Market Caps
This week, Craig Siminski, of CMS Retirement Income Planning, shares with us an article explaining why holding stocks in companies of different sizes can help diversify a portfolio:
The U.S. stock market struggled in 2022, with the S&P 500 index ending the year down 19.4%. The S&P 500, which includes stocks of large U.S. companies, is generally considered representative of the U.S. stock market as a whole, and it is a good benchmark for broad market performance.
But there are thousands of smaller companies, and many of those held onto their stock value better during the market conditions of 2022.
The S&P MidCap 400, which includes midsize companies, ended the year down 14.5%, while the S&P SmallCap 600, which includes smaller companies, was down 17.4%.2 Although these were losses, it was the first year since 2016 that midsize and small companies outperformed large companies (in this case, by having smaller losses).
While large companies have registered the highest average annual returns over the last decade, midsize and small companies have been stronger over longer periods.
Extending Your Reach
As these trends demonstrate, companies of different sizes tend to perform differently in response to market conditions. This suggests that holding stocks in companies of varied sizes could help diversify the stock portion of your portfolio and allow you to pursue a broader range of growth opportunities. Diversification is a method to help manage risk; it does not guarantee a profit or protect against investment loss.
The most convenient and comprehensive way to diversify by size is through mutual funds or exchange-traded funds that track indexes based on market capitalization, calculated by multiplying the number of outstanding shares by the price per share. There is no standard…
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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 25 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.
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