Investors saving for retirement-still reeling from the trauma they've endured over the past year-are understandably looking for safety and averse to anything labeled as "risky."
So where exactly does that leave small-cap equities?
If you go by the traditional view, small-cap companies are riskier plays than their mid- and large-cap counterparts and, therefore, an asset class category that should be viewed warily.
Small caps can provide a higher upside, but as a whole, the group consists of thousands of fragile and under-researched companies that are extremely sensitive to changes in the marketplace and the economy. This point was hammered home in 2007, when small caps were the first to plummet as the subprime mortgage meltdown cascaded into a full-blown recession.
At a time when investors and their advisors are trying to safeguard what's left of their retirement accounts, investing in small caps would seem like a lot of risk to swallow. But market watchers say investors would be wise to do just that.
Take them or leave them, small-cap companies remain an integral part of the economy-some say its most dynamic part-and should have some representation in a well-diversified retirement portfolio, experts say.
Money managers also note that all equities hold risks and, over the long run, small caps have historically outperformed large caps. They also note that small caps, while the first to fall at the start of a recession, are typically the best performers as the economy goes into a recovery.
"They represent a vital part of our economy," says Whitney George, co-chief investment officer with The Royce Funds, a 37-year-old shop that specializes in small-cap value investing. "It's where new innovation is found, new business models and new products."
Small caps typically grow faster than larger companies, he says, noting that most big companies started out as a small cap. "They comprise a pretty broad space between a venture capital idea and when something gets into the S&P 500," he says.
One of the riskier aspects of small-cap companies-the lack of analysis and reporting by Wall Street-also stands out as one of their benefits, argues Jim Roumell, president of Roumell Asset Management in Washington, D.C.