Should I invest in large cap or mid-cap?
If she is a conservative investor and is unwilling to take on much risk, then large caps are advisable. She must only consider investing in mid and small caps if she is willing to take high risk to earn higher returns and has a longer investment horizon, so as not to be tormented with the short-term volatility.
Small-cap stocks and large-cap stocks both come with their own pros and cons. While small-cap stocks can generate higher returns, they also have a higher risk profile. Conversely, large-cap stocks witness smaller growth but are more stable. Investors should consider investing in both for a balanced portfolio.
Large Cap should be a choice for those individuals who need to make good use of equity investments but don't need their returns to keep on fluctuating with time. Since large-cap funds are known to be financially stable, they are capable of withstanding bear markets.
The decision to invest in large-cap funds hinges on your circ*mstances and investment objectives. Although large-cap funds may present lower potential returns compared to smaller companies, they have the potential to deliver consistent and stable growth over the long term.
Experts recommend that investors hold a mix of large-, small- and mid-cap stock to diversify their portfolios. Investors may choose individual large-cap stocks or mutual funds that consist of stock from multiple large cap companies.
If she is a conservative investor and is unwilling to take on much risk, then large caps are advisable. She must only consider investing in mid and small caps if she is willing to take high risk to earn higher returns and has a longer investment horizon, so as not to be tormented with the short-term volatility.
Chart is provided for illustrative purposes. Past performance is no guarantee of future results. For the most part, mid caps have consistently outperformed large caps over various timeframes (see Exhibit 2).
Balanced Investor: A balanced investor should consider having some exposure to small-cap stocks. The remaining 25–30% can be divided between midcaps and small-caps, with roughly 70–75% allocated to large caps.
To find an appropriate investment mix for your time horizon, find your age and the corresponding portfolio allocation. A typical mixture could include 60% large-cap (established companies), 20% mid-cap/small-cap (small to medium-sized compa- nies), and 20% international (companies outside the U.S.) stocks.
Large-cap stocks tend to be companies that are established in their markets with long-term histories. Some feel this makes them “safer” to invest in. Larger company stocks also often pay dividends, allowing you to capture some of the return of your investment, which some investors view as a benefit.
How risky are large-cap stocks?
Large-cap stocks are generally considered to be safer investments than their mid- and small-cap stock counterparts because they are larger, more established companies with a proven track record. Some of the biggest names in business are large-cap stocks – Apple, Microsoft and Alphabet, for example.
Individuals who are willing to take higher risks for greater returns should invest in mid cap funds. This is because, in the short to medium term, these fund schemes can be highly volatile. However, the high risks also provide the opportunity to gain market-beating returns.
Small Caps Trail the Market
“We haven't seen a positive inflection higher in earnings, margins, and forecasted growth for small-cap companies as we have for some of the larger growth cohort,” Akullian says. That's not to say they won't ever break out. “They will certainly have their day,” she adds.
We expect lackluster global earnings growth with downside for equities from current levels.” Against this backdrop, value stocks have a strong chance of outperforming their growth counterparts in 2024.
Thanks to their more established business models and footholds in their respective industries, mid-cap companies are generally considered to be less risky investments than small-caps.
If you are a risk-averse investor but want to benefit from equity investments, then large cap equity funds are the best option available to you. Since these schemes invest in financially strong large cap companies, they can withstand a slowdown in the markets.
Industry experts suggest mid-caps are able to produce better returns because they are quicker to act than large caps and more financially stable than small caps, providing a one-two punch in the quest for growth. Investors interested in mid-cap stocks should consider the quality of revenue growth when investing.
If, on the other hand, the economy begins to slow down or enter a recession, then mid-cap companies will outperform small-caps. As seen in the figure below, mid and small-caps (represented by the S&P 600) perform well in the early stages of the business cycle as soon as people sense a recovery.
Lower Volatility, Better Risk-Adjusted Performance
In addition, while mid-caps had more risk than large-caps, investors have been rewarded with a higher return over the same period.
Relative to other asset classes, mid caps have produced a higher average annual return and lower volatility. Over the last 25 years, the Russell Midcap Index returned 9.3% annually, compared to 7.6% for the S&P 500 (large cap), 7.7% for the Russell 1000 (large cap), and 7.9% for the Russell 2000 Index (small cap).
What is the best portfolio balance by age?
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
As you reach your 50s, consider allocating 60% of your portfolio to stocks and 40% to bonds. Adjust those numbers according to your risk tolerance. If risk makes you nervous, decrease the stock percentage and increase the bond percentage.
1 thumb rule of investing? Allocate 30% of your monthly salary to dividend investments for the benefit of future generations. Following that, distribute 30% equally between equity and debt components. Invest 30% of your retirement funds in debt schemes that generate income.
A good asset allocation varies by individual and can depend on various factors, including age, financial targets, and appetite for risk. Historically, an asset allocation of 60% stocks and 40% bonds was considered optimal.
