Investment Consult

March 18, 2005

You still need small-caps

Even though small-caps have lost their price edge over large-caps, the performance numbers show why they still deserve a place in your portfolio. From April 1, 2000-just after the S&P 500 Stock Index peaked-through Jan. 31, 2005, small-cap stocks returned 4.5 percent a year on average. During that same period, the value of large-caps declined 3.3 percent. Undervalued small-cap stocks in particular, as represented by the Russell 2000 Value Index, averaged an astounding 16.1 percent annually.

True, small-caps are generally more volatile than their big brethren. That's partly because a small-cap has fewer shareholders than a popular large-cap, so if some of its major investors sell their shares, the stock's price will be more prone to big dips-particularly when the overall market is weak.

Even so, it would be a mistake to ignore small-caps entirely. Here's why:


For all these reasons, I'd recommend that small-caps make up at least 10 percent of your portfolio. As you may already know from reading this column, I favor mutual funds for investing in stocks, especially for busy doctors, most of whom don't have the time or the inclination to do the research necessary to build a diversified portfolio of individual stocks. So here are three solid no-load small-cap funds to consider:

Royce Opportunity (800-221-4268). This fund has reopened to new investors after closing for six months in 2004. Its five-year average annualized return of 16 percent is more than 16 percentage points better than the return of the S&P 500, a large-cap index, over the same span. (All figures are through Feb. 25, 2005, unless otherwise noted.)