Small-Cap Vs Large-Cap Historical Performance Chart
When investing in the stock market, one of the most important decisions you will make is choosing between small-cap and large-cap stocks. Both options have their own benefits and drawbacks, and it is important to understand their historical performance to make an informed decision.
What are Small-Cap and Large-Cap Stocks?
Small-cap stocks are shares of companies with a market capitalization of between $300 million and $2 billion. These companies are often in their early stages of growth and have a higher risk profile. Large-cap stocks, on the other hand, are shares of companies with a market capitalization of $10 billion or more. These companies are more established and have a lower risk profile.
Historical Performance
Historically, small-cap stocks have outperformed large-cap stocks over the long-term. According to a study by Ibbotson Associates, small-cap stocks averaged an annual return of 12.9% between 1926 and 2018, while large-cap stocks averaged an annual return of 9.5% over the same period. However, this does not mean that small-cap stocks are always the better investment option.
Risk and Volatility
Small-cap stocks are generally more volatile and carry a higher risk than large-cap stocks. This is because small-cap companies are often in their early stages of growth and are more vulnerable to economic downturns and market fluctuations. Large-cap stocks, on the other hand, are generally more stable and less volatile.
Diversification
Diversification is key when it comes to investing. By diversifying your portfolio with a mix of small-cap and large-cap stocks, you can reduce your overall risk and potentially increase your returns. This is because small-cap and large-cap stocks tend to have different performance patterns and may perform differently in different market conditions.
Market Conditions
The performance of small-cap and large-cap stocks is also influenced by market conditions. During periods of economic expansion and growth, small-cap stocks tend to outperform large-cap stocks. However, during periods of economic contraction and volatility, large-cap stocks tend to perform better.
Conclusion
Choosing between small-cap and large-cap stocks ultimately depends on your investment goals, risk tolerance, and market conditions. While small-cap stocks may offer higher returns over the long-term, they also come with higher risk and volatility. Large-cap stocks, on the other hand, offer greater stability and lower risk. By diversifying your portfolio with a mix of small-cap and large-cap stocks, you can potentially reduce your overall risk and increase your returns.