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Small Packages

For diversity-hungry investors, good things come in small cap stocks.

Everyone knows bigger is better. Bigger houses and bigger cars are signs of bigger paychecks and bigger success. The stock market has echoed this theme, with the large companies housed in the Dow Jones Industrial Average and Standard & Poor's 500 (S&P 500) racking up, well, really big gains for the past two years. Actor Tom Hanks could tell you that "Big" was good for him. But as comedian Steve Martin once put it, maybe now's the time for everyone to get small . . . small-company stocks, that is.

At first glance, the question seems academic. Why should investors abandon what seems to be a sure thing to embark on what could be a volatile and risky relationship? After all, for the 12 months ending April 1997, the total return of the Russell 2000, an index of small stocks--also known as small caps--lagged behind the S&P 500 by a big 20 percent--the second-worst trailing-two-month performance in the history of the index. But Claudia Mott, director of small-company research at New York City-based Prudential Securities Inc., a full-service brokerage firm, notes that now could be the time to take the plunge. "Historically, the average return for the Russell 2000 in the six-month period following substantial trailing-12-month underperformance is well above 20 percent," says Mott. "Although many of these periods overlap, there have been only three subsequent six-month periods in which the small caps underperformed the S&P Composite." Yet the question remains: Should small stocks be a part of your portfolio?

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This article was originally published in the November 1997 print edition of Entrepreneur with the headline: Small Packages.

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