DRIP Investor

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Charles Carlson, CFA
Editor, DRIP Investor Newsletter

Why Everyone Should Own Small Stocks

9/2/08


I know a lot of investors who avoid small stocks because they are “too risky.”

The problem with avoiding small stocks, however, is that you forgo the opportunity for better returns over time.

According to Ibbotson Associates, a $1,000 investment in large-cap stocks at the end of 1925 would have grown to $3.25 million by the end of 2007.

That’s a pretty solid return — about 10.4% per year.

However, had you invested in small-cap stocks, your return would have been much greater. Indeed, according to Ibbotson, a $1,000 investment in small-cap stocks at the end of 1925 would have grown to more than $15 million by the end of 2007. That’s an average annual return of 12.5%.

The other reason to include small-cap stocks in your portfolio is that, if you exclude small-cap stocks, you are basically excluding from consideration roughly nine out of every 10 publicly traded stocks. And eliminating that many stocks from your opportunity set is not a good idea.

Bottom line: You need to own small-cap stocks in a portfolio. If you like to buy stocks direct, one small-cap stock worth considering is Cash America (CSH). The company runs pawn shops and has an excellent track record. To be sure, these shares also have a history of wide price swings. However, as part of a broader portfolio, these shares provide exposure to small-cap stocks. You can buy shares in Cash America direct, the first share and every share. For contact numbers to obtain enrollment information for Cash America as well as other direct-purchase plans, click here.