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Most investors today
know the value and role of
large-cap and small-cap stocks in a portfolio
allocation. Large-cap stocks provide greater return
stability and lower volatility than their small-cap
counterparts. Small-cap stocks, on the other hand, have
the potential to provide larger returns, but with higher
risk and more volatility. Given these two extremes of
the equity risk/return frontier, mid-cap stocks may be
an alternative to consider for a well-diversified
portfolio.
Although there are variations in the definition of the
term “mid-cap,” mid-cap stocks are generally defined as
those with market caps between $2 and $12 billion.
Sometimes referred to as a “sweet spot” in the stock
market, the mid-cap stock segment is an often overlooked
area and may offer key benefits as part of a diversified
portfolio:
1) Mid-cap
stocks may carry less risk than small-cap stocks.
Having already gone through the growing pains of being a
small company, the risk of failure is generally lower
for mid-cap companies. These companies have normally
gained enough footing in the marketplace to fend off
threats and navigate through economic turbulence. By
contrast, small-caps are still in a vulnerable stage in
the business cycle.
2) Historically,
mid-cap stocks have produced greater returns over the
long-run than large-cap stocks. The S&P
Mid-Cap 400® Index has outperformed the S&P 500® Index
on an average annualized return basis from 1981 through
2006. Most large-cap companies, because of their sheer
size, may find it difficult to grow at a rapid and
sustainable pace, while a mid-cap company may still have
plenty of room to develop, providing investors with
growth opportunities.
Given these characteristics, there is a strong case for
including mid-cap stocks in a well-diversified
portfolio. Mid-caps can provide additional
diversification within a portfolio without the greater
risk and volatility of small-cap stocks. Of course,
investors should be prepared for greater risk and
volatility from mid-cap stocks versus large-cap stocks.
For more information on Diversified Investment Advisors
and our mid-cap funds, visit
www.divinvest.com.
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