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Is Now the Time for Small Caps?

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The stock market is down today, thanks the latest unemployment news. With the labor market continuing to show signs of weakness, Wall Street is working through the idea that economic recovery is going to be slow in coming. However, many believe that recovery is on its way, and that now is a good time for small caps.

The Motley Fool points this out about small caps:

During the last bear market — when most stocks nosedived – small-cap stocks absolutely soared, handing savvy investors 22% a year over the next three years.

Their amazing run during the 2001-2002 recession was no fluke. Starting in the middle of the brutal recession of 1974, small caps made an epic run. Shooting up during the recession and extending their run long after the economy recovered, they returned 28% a year for nearly a decade.

And beginning in 1991, small caps powered right through a sharp downturn and kept gaining — handing investors 116% over three years.

The best part of all of these bits of history? Small caps started their run smack in the middle of the down economy — not after the turnaround. And that means right now is a great time to buy.

With stocks on sale, it is possible to find some truly spectacular deals. And with small caps likely to do well in a rebound, it might be the perfect time to get in on the market.

Small caps can be risky

It is important to understand that small caps are often considered riskier than large caps. Their smaller market capitalization means that there is less cash available to shore the company up. As a result, it is important to be discerning in your small cap investment choices. You should look for companies that show good potential, and that have healthy fundamentals.

Another thing you can do is consider small cap index funds. There area number of index funds and ETFs that provide you with the ability to take advantage of the growth likely to be experienced by small caps, but at the same time spreading the risk around and helping you diversify a little bit.


Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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Don’t Have Much Money? You Can Still Invest

MoneyImage by TW Collins via Flickr

Right now, as many have said, is a good time to get into the stock market. It’s not a great time, like it was a few months ago when  everything could be bought on the cheap, but it’s still a good time to get in and reap the benefits of a rising stock market. Some folks, though, are worried that they don’t have enough money to start investing. The good news is that recent developments have made Wall Street more accessible to greater numbers of people than ever before.

Amateur Asset Allocator has a great post on how you can invest, even though you may not have a great deal of money. Some of the suggestions that he makes include:

  • All in one funds with low minimums and low fees. You can start these with as little as $1,000, and put in a little bit each month.
  • Retirement funds with low minimums. There are many retirement plans that will waive the minimums, letting you start for as little as $50, provided you sign up to automatically invest money each month.

The key is dollar cost averaging

When you have limited funds, the key to successful investing is dollar cost averaging. You put in a certain amount of money each month and buy partial shares. This way, you are always buying as many shares as possible, and you are doing so regularly. Your investment portfolio grows over time, and the consistency can be an advantage. It allows you to reap some of the benefits of investing without having to use a big chunk of capital.

In the end, the key is to get started investing. Figure out how much you can afford each month, and then have that money automatically invested. You’ll be glad you did.


Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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Index Funds: Lower Turnover Equals Lower Taxes

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One of the things we often forget about when making investment decisions is how such decisions will affect our taxes. However, it is important to consider the tax implications of investments that you make. One of the advantages that index funds have over actively managed mutual funds is that there is lower turnover that equates with lower taxes. The Oblivious Investor describes how this works in mutual funds (remember that index funds are types of mutual funds):

With mutual funds (as opposed to, say, shares of individual stocks), you don’t pay taxes only when you sell the fund. You pay taxes each year on your share of the capital gains realized within the fund’s portfolio.

With portfolio turnover in actively managed funds averaging roughly 100% per year, a great deal of the gains end up being short-term capital gains. Because STCGs are taxed at your ordinary income tax rate (as opposed to LTCGs which are taxed at a maximum rate of 15%), investors in actively managed funds end up paying more in taxes than they would with a fund that holds onto its investments for longer periods of time.

This means that you have better tax efficiency with index funds. This is extremely helpful if you are interested in keeping more of your money in your pocket. Use a tax-advantaged retirement account, and you receive these benefits to an even greater degree.

ETFs and tax efficiency

Even though they aren’t mutual funds, ETFs also have some helpful tax advantages. The Oblivious Investor points out that because of how ETFs are created, they normally distribute less frequent capital gains (and smaller gains) to shareholders. This means that you pay less in taxes.

When comparing different investment options, consider taxes as part of your costs. Just as administrative fees and loads are part of the equation, what you pay in taxes should also be considered. If you neglect to factor in taxes, you could be rather unpleasantly surprised.


Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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