Small Stocks: Regaining Investor Appeal

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When the economy starts to recover, small companies will benefit. Here are some stocks to watch.

 

In the recent market downturn, small stocks have been hit particularly hard. During the 12 months ending in March, the average small-cap fund lost 11.6%, lagging large-cap funds by more than nine percentage points. This is not surprising. In bear markets investors avoid small stocks, moving to big blue chips.

 

But you should not steer away from small stocks now. The markets will rebound. And during recoveries, small stocks tend to lead the comeback as investors gain confidence and seek businesses with growth potential. 

 

Plus, there is reason to think that we are near the end of the downturn in small stocks. Many bear markets last only about a year, and the current decline in small stocks has been going on nearly twice that long. 

 

Even if the overall bear market lasts longer than average, this may be the time to shop for small stocks. Many shares sell at big discounts to their historical price levels. In any case, most investors should hold at least some small stocks because they can help to diversify a portfolio; small stocks sometimes rise while big stocks languish.

 

To benefit from the potential revival of small stocks—while taking limited risk—stick with solid companies that have strong balance sheets and little debt, says Michael Petroff, portfolio manager of Heartland Value Plus Fund. “This is not a time to speculate on shaky start-ups that could go under,” says Petroff.

 

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