It's a safe bet that a peek inside most people's portfolios will show a lot of investments centered around big stocks—and rightfully so, because they are the big names that everyone knows. They command attention and are powerful contributors to the economy, as well as the major market indicies such as the Dow Jones Industrial Average and the S&P 500. These are large-capitalization stocks, aka "large-caps" and are generally companies with a market capitalization of greater than $10 billion. (Market capitalization is the number of shares traded on the stock exchange multiplied by the current share price.)
But one thing that may be missing from your portfolio right now is an allocation to mid-cap stocks, and ignoring that sector could be the detriment of long-term investors. According to Russell and Fact Set, the Russell Midcap index beats both the Russell 1000 large-cap index and the Russell 2000 small-cap index well over half the time for one-, three-, five- and 10-year rolling time periods. That's significant.
Sticking to it. They say a diamond is just a piece of coal that stuck to the job. That could be the case here, too. Mid-cap stocks represent firms that have generally succeeded in growing from privately held companies to navigating a public offering to the small-cap stock phase, so it's reasonable to assume that they have sound business models, good leadership, and solid processes. At the same time, they're still small enough that their lack of analyst coverage provides more opportunity for investors doing their own homework to discover a rising star before it really gains traction among the general investing public.
Volatile but manageable. Mid-cap stocks can be more volatile than their large-cap brothers, and this is not something that should be overlooked. In fact, mid-cap stocks may demonstrate levels of volatility commensurate with the volatility of small caps rather than large caps. For this reason, it's important to adhere to diversification within this classification of stocks. Additionally, time is a mid-cap stock's friend when it comes to volatility, since mid-caps' overall volatility decreases to be more in line with large-cap stocks over longer time periods.
Is now the right time? First and foremost, an investor's asset allocation should always be the product of a complete and comprehensive financial plan. That said, mid-cap stocks are especially worthy of consideration as investors regain confidence as recessions end. In fact, Ned Davis research concluded that mid-cap stocks outperformed large-cap stocks for up to two years after the recessions of 1980, 1982, 1991, and 2001 (as measured by the Russell Midcap Index and the Russell 1000 index).
According to the National Bureau of Economic Research (NBER), the current recession ended in June of 2009—whether it feels like it or not. If that's the case, now is still a good time to own mid-cap stocks, especially if you do not currently have an allocation to them.
If you already have mid caps in your portfolio, be sure that you keep an eye on the returns of these investments. It's possible that the returns on your mid-cap investments could quickly grow beyond tolerances you or your advisors may have for your portfolio, which could mean that it's time to rebalance.
As with everything, moderation is key. Be sure not to overdo it. There is never a good reason to "load the boat" on any investment. Remember that your portfolio is much like the engine of a car. You want all the cylinders firing, but some will be going up while others are going down. You are looking for the car to move forward smoothly and the more cylinders in the engine, the smoother the ride.
David B. Armstrong CFA, is a Managing Director and co-founder of Monument Wealth Management in Alexandria VA, a full service Private Wealth Planning and wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. He has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 & 2010) based on asset under management. David and Monument Wealth Management can be followed on their blog at "Off The Wall", their Twitter account @MonumentWealth, and on their Facebook page.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references is historical and is not guarantee of future results. All indices are unmanaged, cannot be invested into directly and do not reflect the deduction of fees and charges inherent to investing. The prices of small- and mid-cap stocks are generally more volatile than large-cap stocks. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.