In hindsight of Brexit referendum and US presidential elections, investors in US have invested most of their funds in large companies in order to safeguard their investments. Investors generally look for a safer investment strategy that could beat the volatility outbreaks at the time of uncertainties. Money managers also advise investors to stick to large cap stocks and reduce exposure to mid and small cap stocks in the days of unstable macroeconomic and political environment. The chart below shows the impact of US elections and Brexit referendum on different indexes around the end of 2016.
US Large vs Mid vs Small Cap Returns (%)
What are large cap mid-cap and small-cap stocks?Large caps are the companies which typically have market capitalization of $10 billion or above, mid-caps are the companies that have market capitalization between $10 billion and $2 billion and small caps are the companies that have market capitalization of less than $2 billion. Large caps tend to be the companies that are stable and dominate their industries. Large cap stocks are less volatile than mid cap and small cap stocks and are therefore considered to be safer investments. The risk of failure is greater with mid cap stocks and small cap stocks, than with large cap, as a result they tend to be the more volatile (and therefore riskier) than large cap. The optimal mix of investment in equities is based on individual investment goals and risk tolerance. Investors aiming for higher returns and willing to take higher risk typically devote more of their portfolio to mid and small cap stocks, whereas more conservative investors allocate a higher percentage of portfolio towards large cap stocks. A typical mix for an average investor is approximately 60% exposure to large cap, 30% to mid and 10% to small cap stocks .
S&P 500The S&P 500 is a stock market index that comprises of common stocks issued by 500 large cap companies that are traded on American exchanges, and covers about 80% of the American equity market by capitalization. The average one-year return for S&P 500 over the last decade has been around 9%. The recent rally in stock prices has improved the performance of S&P 500 index, witnessing a 12.6% increase from November 2016 lows.
Aspect of investing in Large Cap VS Small and Mid-cap
WHY LARGE CAPS?
- 1. Less risky
- 2. Stable growth
- 3. Low Cost of financing
- 4. Reasonable multiples
- 5. Comparative advantage
- 6. Liquidity