Financial Planners Are Wrong About Small Cap Stocks

Most financial advisors are dead wrong when it comes to small cap stocks.
They’ll tell you to have 10%, or less, of your total portfolio invested in small caps. That’s hogwash.
Let me explain…
I was chatting with a financial advisor the other evening at a cocktail party. I told him we have 25% of our retirement invested in small caps so that we can achieve above average returns.
He was adamant, saying that was far too much. We should trim it down to 10%, maybe 15% tops.
I politely listened, but when we left the party I explained to my wife that this guy was dead wrong. If we were to follow his advice we’d have less money when we reach retirement.
The fact is that small caps are the best performing type of stocks over the long haul. All of the data shows this to be true. It’s not some harebrained theory that lacks proof. And you don’t have to be in your 20s, 30s or even your 40s to get the benefits.
You can be far older. All you need to do is maintain constant exposure to small cap stocks, especially small cap dividend stocks.
Vigorous studies dating back to 1925 from Fama and French, Bernstein Research, Ned Davis and Royce Funds all show the same thing. Over the long term, small caps outperform.
Some studies show the outperformance to be 2% to 5% annually. Others show the outperformance to be as high as 20% annually. But they all show the same thing.
And the data isn’t just for risky, small cap growth companies. In fact, small cap dividend stocks trounce the market too.
Thirty years of data from Ned Davis Research show that the best small caps are those that regularly grow their dividends. These small cap dividend growers handedly outperform other stocks. And they even beat large-cap dividend growth stocks by as much as 13% per year.
So what’s the total annual return for small cap dividend growth stocks? Data from Ned Davis Research shows the gains at over 20% a year.

Ned Davis Research: Average Annual Stock Returns 1972 – 2012


Ned Davis’ research also shows another benefit of owning small cap stocks. They tend to be LESS volatile than their counterparts. Higher returns – with lower volatility – is a recipe for investment success.
My wife and I are approaching 40.  Now we may be younger than the average Income & Prosperity subscriber. But my recommendation to invest in small cap dividend growers makes sense for any investor, even those with a shorter time horizon.
I won’t be lowering my allocation to small cap stocks by even 1 percentage point. I expect above average compounded returns will grow our nest egg considerably over the next twenty five years.
Based on the hard data, and not some financial planner’s misguided opinion, I know small cap stocks are going to continue to beat the market.  When it comes to my income investments, small cap dividend growers are at the top of the list.

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