For decades, analysts have heralded small-cap as the real growers in the . And they're right to some extent; a study that tracked found that U.S. small caps delivered an annualized return of 16.5% compared to returns from 1926 to 2008large caps' annualized return of 12.9%.
So why are investors using large caps as the backbone of their portfolios?
Because most of them have learned, sometimes reluctantly, that large companies have something small companies don't have: deep pockets and stability.
Want to know exactly how large companies such as these make solid, long-term? It all comes down to three main advantages that large-cap companies have over their smaller company counterparts.
Large-CapAdvantage #1: Less Long-Term Risk For A Healthy Reward
Most investors have heard of the tradeoff between risk and reward. But while most investors are focused solely on the return portion of the equation, they can get blindsided by return's conjoined twin: risk.
Risk is measured by the standard deviation of returns. Essentially, standard deviation tells us how widely a security's returns are scattered around its average return. It's how you measure volatility. Clearly, a that is up 40% one year and down 20% the next is more volatile (and thus has a higher standard deviation) than one that gains 12% one year and loses 6% the next.
Recalling the 1926 to 2008 stocks delivered an annual return of 16.5%, beating out large caps' return of 12.9%. But small caps' standard deviation was significantly higher -- 33% versus large caps' standard deviation of 20.6%.study mentioned earlier, small-cap
In this case, small-cap investors may have been rewarded with an extra 3.6% annual return, but they also took on an extra 12.4% of risk. That's sort of like driving fast and recklessly around tight corners to get to the store just a few minutes earlier than you would have if you drove safely -- it's dangerous, and the reward may not be worth it. Large-capinvestors a way to shed some of that excessive risk and still keep most of the healthy returns.
Large-CapAdvantage #2: Iron Defense During Recessions
It's been said many times, but it bears repeating: economy. If the company faces headwinds, it can always use its cash reserves to keep operations running until the economy rebounds. It's a lifeline of staying power and a luxury that most small-cap companies don't have.is king. A large-cap company's hoard is a great defense against a stagnant or declining
In addition, larger companies are equipped with proven business models, established market exposure and brand-name recognition -- qualities that make them more likely to stand the test of time -- and deliver excellent returns for investors over the long term.
That explains why large-capfall far less during downturns. From 1969 to 1970, small caps tumbled 38% while the large-cap S&P 500 fell just 5%.
Don't worry, patient investors who held on to their large-capafter the 2008-2009 crash didn't have to suffer losses for long -- the S&P 500 (which tracks 500 large-cap ) bounced right back and recouped the bulk of its value by April 2010, just over one year later. That's because large, valuable companies stay valuable to investors even in bad .
Large-CapAdvantage #3: A Stockpile of Resources For Strong Future Growth
Even more important than a defense mechanism, a large company's cash hoard and other existing capital (plants, property, technology and special equipment) can be its greatest weapons for adaptability and future growth.
Large companies with multibillion-dollar war chests have used their greenbacks and other resources in a number of ways to expand their businesses and keep their shareholders happy. In 2011, for example:
Bristol-Myers Squibb (NYSE: BMY) transferred $750 million from cash reserves to pay down debt and decrease default risk. The company has also been using cash to invest in research and development to develop new lines of life-saving drugs -- and potentially boost .
Microsoft invested $8.5 billion of its cash to acquire Skype, expanding its already diverse product line, bottom lines. It also decided to boost its dividend payment by 25%.exposure and potentially top and
Consistent dividend raises, heavy in R&D are unique features that mostly only large-cap companies with incredible and strength can provide. And they're all more reasons why many investors love holding onto large-cap .buybacks, acquisitions and
TheTop 10 Stocks for 2013 -- we've uncovered several more large-cap that dominate their , pay increasing dividends and repurchase billions in . To learn more about these ideas, including several names and , please visit this link.Answer: While it's smart for investors to diversify their , large-cap can provide a solid foundation for growth and defense in almost anyone's retirement portfolio. In our latest research --
These excellent qualities make for a solidthat offers steady double-digit returns without all the gut-wrenching price movements that come with holding small-cap .