When an investment gets a thumbs-up from a Nobel Prize-winning economist, it's going to attract the attention of people planning for retirement along with just about anybody involved in wealth management.
Hence, the enthusiasm for small-cap stocks, which are equities from publicly traded companies whose market capitalization — stock price times shares outstanding — ranges from $300 million to $2 billion.
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There is no shortage of investment advice touting small-cap stocks as an essential part of a retirement portfolio. Much of this guidance is replete with references to Eugene Fama, an economist and Nobel laureate who co-wrote a study showing that over time, small-cap stocks outperform their better-known, brand-name big- cap counterparts.
Small-cap stocks may also be aided by a strong U.S. dollar, which can be more of a drag on the earnings of big, multinational companies doing business overseas, according to William Watts of MarketWatch
Small-cap stocks have a place in a retirement portfolio with an optimal asset allocation — meaning how a retirement account's investments are distributed across various stocks and bonds as well as investor funds made up of both.
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Investment adviser and writer Rick Ferri advocates a portfolio "tilt,"
inspired by Fama's research, toward small-cap stocks to take advantage of their market- and inflation-beating high returns. Ferri cautions, however, that this strategy is not for investors who are amateurs, impatient people or faint of heart, because the small-cap sector is notoriously volatile in the near term.
An overwhelmingly small-caps strategy might not be ideal for a future retiree who wants to build a more stable, predictable portfolio. That's where large-cap stocks — the likes of Apple, Exxon or Pfizer — enter into the asset-allocation picture.
One consideration is "where we are in the economic cycle," Michael Sheldon, chief market strategist for RDM Financial Group in Connecticut, told Bankrate
, explaining that small-cap stocks tend to get hammered in recessions — and catch fire during booms because they have so much room to grow.
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