William Sharpe’s capital asset prices study, suggests that market-capitalization (cap) weighting is a fitting opening point for the weighting of any asset class in a portfolio. This applies for large caps, medium caps and small caps, giving an implication that the investor replicates their portfolio in the same ratios as represented in the overall market. To determine the market weight however is an exercise in and of itself. Below are steps you can take to balance your investment portfolio and reap the best.
Make an Investment Plan that spells out what proportion of your investment you want in the different asset classes between large caps, medium caps or small caps. By planning, an investor safeguards against impulsive investment which tend to disrupt monitoring and management performing assets.
Mitigate your Risks
Planning is the first step towards mitigating your risks. Consider investing through a more knowledgeable investment partner especially for small caps which have little information available publicly. A small caps mutual fund run is by specialists may prove to be more profitable for the investor.
Avoid putting all your eggs in one basket. For instance, you can split your stock markets investments to target 60% for large-cap stocks, 25% for small-cap stocks and 15% for foreign markets. Depending on your risk appetite and performances of the markets.
Resist Obvious Swings
When stocks value rise, investors get excited and want to own more and when shares value plummet, they stop buying to some extent panic and sell. This is contrary to how investors should act, buy low ad selling high. During an expansion phase small caps companies have an advantage over large-cap and mid-cap stocks. The stock price rises along with the company's growth, on the other hand large cap stocks fall out of favor. This advantage is usually short-lived, and during a down swing small caps may close shop unable to survive a low consumer demand season.
To address the question of how to balance your portfolio, investors must consider what they expect and whether they can accept the risks associated. Settle on clear percentages of each target portfolio and commit to regular review. This ensures that you receive the best dividend in the long run from all asset classes.