Your Investment Mix: Small Companies or Large Companies? Ep #146

Do you have the right investment mix in your portfolio? Does it include a balance of large and small companies? In this episode of Best In Wealth, I talk about the differences between small and large companies, why you’d want to own either of them, what the science says, and whether or not you can time when to own a small or large company. If you’ve considered adding small companies into your investment mix, check out this episode![bctt tweet="What should you have in your investment mix? In this episode of Best in Wealth, I talk about small companies and large companies—and why you should invest in both. #wealth #retirement #investing #PersonalFinance #FinancialPlanning #RetirementPlanning #WealthManagement" username=""]Outline of This Episode[1:19] What’s been going on with the stock market[3:50] Do you have the right investment mix in your portfolio?[4:43] Where the stock market stands right now[6:31] The definition of what makes a large or small company[8:11] Why would I want to own a small company?[12:22] Why you should demand a higher rate of return with small[14:56] What the science of investment tells us[18:34] Why you shouldn’t apply market timing tactics[21:05] What the performance of small and large companies tells us[22:20] Know what your goals are before you develop your investment planWhat defines a small or large company?A large company is calculated by taking its outstanding shares and multiplying them by their current stock price. If the resulting number is $10 billion or higher, it’s considered a large company. Think brands like Apple, Amazon, Facebook, McDonald’s, etc.A small company is calculated in the same way—by taking their outstanding shares and multiplying them by their current stock price. However, If the resulting number is between around $500 million and around $2 billion it is considered a small company. These still aren’t “small” by most people’s definition of small (i.e. a local plumbing company).Right now, year-to-date, The S&P 500 is only down 3.5% and small companies are down about 15%. Keep listening as we discuss why that’s important.Why your investment mix should include small companiesLet’s say McDonald’s is worth $200 billion. McDonald’s has amazing brand recognition, thousands of locations, and years of positive cashflow. Versus Shake Shack—hypothetically worth around $2 billion, less brand recognition, fewer locations, etc. It makes sense to invest in McDonald’s. After all, the odds of them going belly up are slim-to-none.About 3% of small companies go out of business in any given year, and up to 6% during economically tough years. But it’s also far easier to take a $2 billion company and double it to $4 billion than to double McDonald’s massive $200 billion empire. Shake Shack is a riskier investment, but as an investor, you can demand a higher rate of return owning Shake Shack vs. McDonald’s.[bctt tweet="Why should your investment mix include small companies? I share the details in this episode of Best in Wealth. Don’t miss it! #wealth #retirement #investing #PersonalFinance #FinancialPlanning #RetirementPlanning #WealthManagement" username=""]What does science tell us?The first key I emphasize when you invest in anything is that it has to make sense. The data has to be persistent and robust and the science has to be pervasive, in the US and around the world. So what does the science tell us?From 1928 to 2019, large companies average a return on your investment of approximately 9.9% a year. Small companies average a return of investment of 11.94% a year. A 2% difference might seem minuscule, but think about it this way:If you allot $100,000 to large companies, hold it for 30 years and obtain a 9.9% ROI, you’d see a $1.7 million...