When Is the Best Time to Invest in Small-Cap Stocks?


Regardless of your experience as an investor, maybe you’re up for turning your attention to small-cap stocks. These relate to publicly traded companies with market capitalizations ranging from $300 million to $2 billion. Here are some aspects to consider that can help you decide when to move ahead with your small-cap investments.

Your Risk Tolerance

Small-cap stocks are more affordable than mid- or large-cap stocks. However, they’re also more volatile due to typically being comparably less mature than their counterparts.

The best time to invest in small-cap stocks is when you have devoted enough time to understanding the risk involved and feel comfortable accepting it. These investments generally provide better long-term investments, but they don’t have the same resources to withstand economic downturns as larger companies.

All investing carries some degree of risk. However, analysts often say that small-cap risk is above average, and that it deserves careful consideration from people who have not dealt with these kinds of stocks before.

The Likelihood of a Near-Term Economic Rebound

Analysts have also recommended that people invest in small-cap stocks once the economy starts to recover after a recession. Keeping a close eye on economic conditions is a wise move for any investor, but it could tie into your success as a small-cap stock investor.

For example, if the economy seems set to improve, you might get ready for that possibility by researching small-cap stocks that catch your interest. Some of those recently recommended by market experts include XBiotech Inc., which specializes in commercializing monoclonal antibodies, and global IT consulting firm Unisys Corp.

Those are just a couple of examples. You’re likely to get the best results by studying small-cap companies first and determining which ones seem set to do well soon or are already enjoying success.

How Developing Events Could Change Small-Cap Performance

Many investors wonder if they should prioritize investing in small-cap stocks associated with the COVID-19 pandemic. After all, it’s a top-of-mind-concern for most people these days. However, experts caution that some coronavirus-related stocks may not play out as the smart investments they first appear to be.

Many publicly traded companies stayed afloat at the beginning of the pandemic with help from business grants and loans. One significant advantage of grants is that recipients don’t have to pay them back and can use the resources to grow their business and recover. However, some companies were exceptionally well-positioned to profit during the pandemic and were less likely to need financial assistance.

For example, VBI Vaccines is a small-cap company that generated investor attention in September after signing a contract with the Canadian government worth more than $42 million. However, its COVID-19 vaccine candidate is not yet in Phase I trials, putting it behind other competitors. Another thing to consider is that as general vaccine progress continues, small-cap companies could lose ground if they offer products related to treatment and testing for the virus.

Try to adopt a long-term view when assessing small-cap stocks. Do the associated companies sell products that will stay in demand no matter what? If so, that’s a good sign that you can consider them as smart investments. Anything can happen, of course, but gauging the long-term demand associated with a company can help you anticipate the future.

How Close You Are to Retirement Age

People commonly think of their retirement plans as they consider their investment decisions. The number of years a person has until they intend to retire could help them decide whether now is the right time to invest in small-cap stocks. Several years ago, investment expert Paul A. Merriman advised that if someone’s primary goal is to save for retirement, small-cap stocks could comprise a major part of their portfolio.

He answered a set of questions, including one from a person who was under 30 and thinking about putting their whole 401(k) into a small-cap value index fund and wanted an opinion on that potential move. Merriman advised that overweighting a portfolio towards small-cap value stocks in the early years of saving for retirement was something he’d come to view as a great idea.

Merriman also proposed an alternative for people who have at least 40 years before they plan to retire. He asked people to consider making a major lifetime investment to small-cap value stocks and funds — those undervalued in price. Merriman set up a scenario where a person invests $5,000 per year for four decades that way.

He also said that if people can afford to invest more than that in a particular year, they should put the excess into other classes. That approach helps a person diversify their portfolio while still focusing on small-caps. These possibilities give you things to think about if one of your main reasons for investing is to prepare yourself for your retirement years.

Consider Individual Circumstances Before Deciding

Making confident investment choices can feel challenging because there are no universally right answers. However, you’ll be well on your way to making the decisions that are right for you by assessing your current situation and your long-term investment plans.After thoroughly considering those things and thinking about this overview, it’ll be easier for you to conclude whether now is the best time to put your attention towards small-caps.

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