Why You Should Invest in Small-Cap Stocks

When it comes to investing in stocks there are a lot of different choices that you need to make. One of those is whether to invest in so-called “small-cap” stocks and, if that’s what you’re considering, here are a couple of quick reasons that make it a good investment.

First off, since small-cap stocks are usually relatively unknown, it’s likely that you’ll find something that everyone else might have overlooked. The fact is, large, well-known companies are going to have plenty of people interested in buying their stocks, and the typical Wall Street analyst spends his or her day focusing completely on these companies, searching for any edge that will help them to earn a profit.

It’s almost exactly the opposite for small-cap stocks which, unlike a popular tourist attraction, are more like and abandoned warehouse; no one notices them, but they have a huge capacity. Many of these smaller companies are little gems that are just sitting, waiting for the right catalyst to thrust them in to view. Yes, they do come with a bit of risk but they also promise quite a bit of rewards as well.

Two of the best reasons to invest in small cap stocks are the fact that smaller companies are more agile than larger companies and also tend to be much less bureaucratic. At the helm of these companies are usually entrepreneurs that are quite focused on success, and most are often the actual founders of the business. They thus have a huge personal stake in the success of their company, something that bodes well for the success of their stocks.

One other reason that investing in small cap stocks is a good idea is that many institutional investors don’t bother with them because they handle too much money with large-cap stocks and have clients that are much too conservative to care. What this means for many small-cap companies, who might become tomorrow’s big winners, is that they are shunned by Wall Street analysts and the large investors that they cater to.

The fact is, if you want to focus on financial performance, high quality of management and high intrinsic value also, your best bet is to find small-cap stocks that are unknown today but will become tomorrow’s best investment. It might take a little bit of research and a bit of extra time, but the financial rewards could be significant.

Thinking of Buying Junk Bonds? Read This First

While it’s true that junk bonds still pay more than most, the fact is that bargains on junk bonds are becoming more scarce. With interest rates extremely low, buying junk bonds because of the extra income that you will get from their high yield can be tempting, but before you do, it’s best to know exactly what situation you’re getting into.

When a company has poor credit they issue what they call junk bonds and the yield on these bonds tends to be better than those of other low risk debt such as treasury bonds. In the last few years however, the demand for junk bonds from investors has pushed up their prices and cut back on their yields. (The reason is that bond prices move opposite to their yield.)

While the long-term average is approximately 9.5%, junk bonds recently paid out only 5.8%, a gap between their yield and that of comparable treasuries that’s almost 2 percentage points below average.

What that means, given their low yields, is that a junk bond pullback is possible. In July and August of this year it actually happened for about two weeks when, due to worries about the Middle East and Ukraine, US stocks retreated. Since junk bonds tend to move along with stocks, they also pulled back. Even one of the best benchmarks for junk bonds, Bank of America Merrill Lynch US High Yield Master II index junk bonds, declined 1%.

Thankfully the damage caused was minimal, stocks recovered and the US High Yield Master II index has since returned to 5.3%. Unfortunately, that also means that junk bonds are still relatively expensive. According to Mark Freeman, the co-manager of the Westwood Income Opportunity fund, “there hasn’t been a dramatic repricing,” in junk bonds.

That being said, holding on to some junk bonds still makes sense because of their higher interest payments, but financial advisors are still being cautious. Junk bonds could still be damaged if the economy begins to falter or a drop in share prices of 10% to 20%, a stock market correction, happens.

Most financial advisors still recommend keeping approximately 3 to 8% of your portfolio in junk bonds. 2 of the best choices available right now include;

  • Osterweis Strategic Income Fund (OSTIX).
  • Vanguard High-Yield Corporate (VWEHX).

Point being, while dumping your junk bonds completely isn’t necessary, picking and choosing them correctly is a must.

While there is no doubt that that having plenty of cash is a good thing, when it comes to investing and having cash in your portfolio, it’s still quite controversial. The question about what could be considered “too much” cash in your portfolio is still one that’s debated hotly.

They heat under that debate was turned up even more recently when Intelligent Portfolios was launched by Charles Schwab. It’s an algorithm-based platform that automatically builds and automatically balances someone’s portfolio. What raised a lot of eyebrows was the treatment of cash that Intelligent Portfolios gave, allocating anywhere from 6 to 30% for cash based predominantly on the risk profile of the investor.

Charles Schwab responded to the criticism by saying that “There’s no right or wrong answer to how much cash an investor should hold as an investment, it is a strategic decision,” adding that “Is easy to question cash in the sixth year of a bull market and when the Federal Reserve is artificially suppressing interest rates, but we don’t invest based on the last six years. We invest based on what we expect the future may hold. Bull markets end an interest rates rise. When they do, a little cash will feel pretty good.”

One thing that both sides agree on is simply this; there isn’t a “one-size-fits-all” solution. Every investor has a different risk tolerance, different investment goals, a different investment horizon and different investing strategies. That being said, the advice below should help each individual investor to determine how much cash is best in their particular portfolio.

First is simply to keep household cash and portfolio cash separate. You should have a certain amount of cash in your portfolio and keep separate accounts in your bank and in an emergency fund. The fact is, experts agree that there isn’t a huge benefit to having a large amount of cash in your portfolio but, as far as household cash is concerned, having at least six month’s worth of living expenses in an emergency fund (and, even better, 12) is a good idea.

Once you determine that you have enough emergency savings, it’s time to figure out how much, and which proportion, of your investable assets you should keep in cash in your portfolio. Keep in mind that cash in your portfolio doesn’t produce any yield, which has led to the term “cash drag”.

The fact is, many experts believe that having too much cash holdings in your portfolio is simply a sign of either fear or emotional concern. They suggest that keeping your emotions in check is the best way to figure out how much cash you should have in your portfolio, and also to keep in mind that keeping up with inflation is hard to do with cash.

One last note is that keeping a lot of cash in your portfolio because you’re either afraid of the future or, even worse, trying to time the market, is a big mistake. The fact is, a look back at investing history will show you that timing the market is very difficult, both for amateurs and professionals.

The Basics of REITs

Today’s short blog is going to look at REITs, what they are and why they are considered an excellent investment and excellent addition to any portfolio.

The definition of a REIT is a security on any of the major stock exchanges that sells like a stock and invest directly in real estate through either properties or mortgages. REITs are highly liquid method to invest in real estate, they receive special tax considerations and, in most cases, offer high yields to investors.

There are a number of different types of REITs available, including Equity REITs that invest in and own properties. The name comes from the fact that they are responsible for the equity (value) of the real estate assets they hold. The majority revenues from REITs come from the rents on those properties.

A Mortgage REIT is when you have an investment in and ownership of property mortgages. These start when an REIT loans money to real estate owners for mortgages, or they purchase either existing mortgages or securities that are backed by mortgages. The interest that they earn on their mortgage loans is principally where the revenues are generated with a mortgage REIT.

Lastly there are Hybrid REITs. These combine the strategies of both Equity and Mortgage REITs because they invest in both mortgages and properties.

If you wish to invest in REITs there are a number of ways to do so. You can either purchase shares directly on open exchange or, if you wish to invest in a mutual fund, find one that specializes in public real estate.

Many REITs also come with dividend reinvestment plans or DRIPs, which is definitely an additional benefit. Some of the properties that REITs invest in are warehouses, hotels, office buildings, shopping malls and apartment buildings. You can also find some that specialize in a specific area, for example office buildings, or a specific area of either a state or country.

In short, if you wish to get into real estate as an investment, and have a liquid, dividend paying asset, REITs are an excellent choice.

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