There are a lot of golden rules in investing. Buy low and sell high. Dont pay more in expenses than necessary. Buy small-company stocks for diversification.
Many investors have done all of those things, including dutifully putting money into small-cap funds only to watch them badly trail the S&P 500 index for much of the 1980s and 1990s. Thats okay, they thought, because at least the small caps were diversifying their portfolios and lowering their overall risk.
Sad to say, all that small-cap-induced pain may have been for naught. If these investors had held mid-caps instead of small caps over the past 20 years, they not only would have lowered their portfolios risk, but they also would have improved their returns.
Suppose they had placed 60% of their portfolios in the S&P 500 index and 40% in the Russell 2000, a common small-cap index. From 1979 to 1998, that portfolio would have delivered lower returns than that of a pure S&P 500 portfolio, with about the same amount of risk. (Even with the rally in small-cap land in recent years, mid-caps have still kept pace, generally posting roughly equivalent returns with slightly less volatility.) If they had devoted 40% to mid-caps instead of small caps, however, risk would have fallen, but returns would have remained about the same.
Returns that are competitive with small-cap funds, but with less risk--looks like its time to consider how mid-cap funds can work in your portfolio.
Mid-Cap Stocks: What They Are >>