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What Kind of Exposure Should an Investor Have?

by:Mayer     2020-05-24
When you are looking at how much of your portfolio is made up of small cap stocks it will depend on a few things and it will be unique to your situation. One thing to consider is your time horizon; if you need your money to come out in a year or two, then it is better that you invest in something much safer that will ensure that you retain all or most of your principal investment. Suppose you go into small cap stock, and the price goes down. It might be because the company is still new and is taking losses to move into the correct market. Big gains may be coming in the near future, but if you have to get out you will not see them. At this point you have to lock in your losses. Selling low is not what any investor wants to do. Rebalancing is also important. If you have small caps in your portfolio and they perform well, that's great. If you don't sell some of them to rebalance your portfolio you may end up being overexposed and take an unnecessary hit in a bear market. Talk to your investment professional about automatic rebalancing and talk to them regularly. They don't have a crystal ball but they can help you maintain the correct exposure and match your portfolio to your investment goals. If your time horizon is long, then you should have some portion of your portfolio in small cap stocks. Believe it or not, the small caps outperform the large cap stocks in the long run. That may seem odd, but not if you think about it. Take the Microsoft example for instance. They experienced growth like few companies ever do, but once most of the public has your product then maintaining sales can be hard enough, much less increasing sales and seeing further growth. There can be more than one point in time that it makes sense to get in on a company. If they have an initial public offering, like a life insurance that was previously mutually owned (owned by policyholders) and then has shares available on the market you will often see the share price rise almost immediately. It might not be sustained but it rarely will go back down. A company might also be on the verge of going big; they have an excellent product, sales are increasing and production costs are going down as more units are being produced.
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