The Best Asset Class to own for the Long term…Small Cap Value

The Best Asset Class to own for the Long term…Small Cap Value

Studies have shown that over time the best asset class to invest in is small cap value. Why? Well first of all small caps fly under the radar of most investors. The attitude is usually, who cares? Investment bankers have little interest; they can’t make any money doing business with them. They are never in the news. But therein lies their attractiveness, they have wager value (little used or known information). Focusing on under used information has got to be a good thing as there is less competition in this area of the stock market. If small cap value is such a good place to invest why not invest in small cap growth? Small cap growth stocks carry with them high expectations for the future and are usually priced accordingly and being small caps to begin with there is more risk in investing in them as there are more inherent risks in investing in small caps to begin with.

To help improve your odds of investing in the small cap value area, an investor should focus on balance sheet quality, positive cash flow and the experience and quality of the management team. These stocks are often takeover candidates providing their investors with liquidity events for the management of their investment portfolios. To avoid value traps, check to see if revenues have been growing over the last three years.

In the macro world where periodic debt crises and instability occur, these companies are often in a position to not only survive but have the resources to capitalize on growth opportunities.

If investing in this area scares you too much you might want to compromise and consider the mid-cap area of the market. The long term returns are a little less but they can be more liquid and have a greater scale in their operations. 

If investing in this area of the market still seems too risky, you might want to consider a barbell approach to managing your investment portfolio. Put half you investment capital in stable dividend growth stocks and the other half in under valued small cap stocks. You can season this idea to your own personal taste and adjust the ratio of these assets as you see fit...50/50...60/40...70/30 and so on.