On the one hand, mid-caps would have worked better in your portfolio than small caps over the past 20 years. On the other hand, theres no guarantee that theyll continue to outperform small caps. What to do?
We suggest hedging your bets. Dont think about breaking your portfolio into large- and small-cap portions. Instead, think of large-cap and non-large-cap exposure. Mid-caps could be especially useful for investors who want diversification but who cant stand the volatility of small-company stocks.
As a fund investor, to get the benefit of mid-cap stocks you need to find true mid-cap funds. That can be a tall order. Many mid-cap funds gain that classification because their managers buy a mix of large- and small-cap companies. Relatively few managers seem committed to the markets middle, perhaps because its just not as glamorous as investing in one of the extremes.
To find funds specifically targeting the middle part of the market, look for funds with mid-cap in their names, such as T. Rowe Price Mid-Cap Growth RPMGX or Vanguard Mid Capitalization Index VIMSX. Premium members can also find what percentage of a funds holdings are in mid-cap stocks on our Quicktake Reports. Some fund-family Web sites also provide this information.