What if everything you’ve been sold by “financial experts” about index investing is an elaborate lie?
You’ve probably heard that small-caps are high risk and high reward. This part is true.
Then, “the experts” go on to say that if you diversify your holdings, it makes it less likely that any one stock will ruin your portfolio. This is also true.
So where’s this hidden fallacy?
When they extrapolate this to say, “Why not make it easier on yourself and just buy into a small-cap mutual fund or exchange traded fund (ETF) like the iShares Russell 2000 ETF (NYSEARCA: IWM), which tracks the Russell 2000?”
That’s where they blow it.
It all sounds so logical, but this last step is deeply flawed and one that’s cost countless investors better returns.
Now, we’re not saying that trading these ETFs or investing in the short-term is a bad idea by any stretch.
But you should NEVER look to hold these ETFs as investments.
Now, there is a RIGHT WAY to invest in small-caps or mid-caps. We’ll get to that in a bit.
For now, it’s buckle up buttercup, because the truth train is leaving the station, and it’s not making any bathroom stops until we unmask this false reality.
The Obvious Truth
We want to start with a definition of the most common small-cap index, the Russell 2000:
“The Russell 2000 Index is a small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.”
How much weight do you think the top stocks in this index have?
Here’s a list from Blackrock, which runs the IWM ETF:
The top 10 holdings account for 3.62% of the total index.
Now, let’s look at the top 10 holdings for the SPDR S&P 500 ETF Trust (NYSEARCA: SPY):
The top 10 holdings here account for 30.42% of the total index.
That makes sense, since technology stocks have done extremely well over the last decade, even with the recent pullbacks.
Doesn’t the Russell 2000 hold technology stocks?
Of course.
But guess what happens when a stock gets TOO BIG?
It gets an upgrade to the mid-cap index.
And when a mid-cap index stock gets too big, it gets upgraded to the S&P 500.
That’s the key reason why the ETFs that track small-caps and mid-caps will almost always underperform.
THEIR GAINS ARE CAPPED!
You think Tesla (NASDAQ: TSLA) was always part of the S&P 500? Heck no.
It started as a tiny four-letter ticker in the small-cap index. Over time, it grew to become a mid-cap and then part of the S&P 500.
Once you’re in the S&P 500, the sky is the limit. You can grow to be like Apple (NASDAQ: AAPL), Exxon (NYSE: XOM) or some other world-dominating conglomerate.
But for small-cap and mid-cap indexes, the only way you make money is to have them ALL grow together.
That’s great as an indicator for economic health. It’s lousy as an investment strategy.
Rethinking Small Caps
Before you start tossing every small-cap company from your portfolio… STOP!
That’s not what we’re suggesting. In fact, small-cap companies have some of the greatest investment potential of any group. Stocks in hot industries like artificial intelligence can grow with the industry AND take market share.
And don’t reject diversification either. That’s still an integral part of the plan.
The difference is that YOU take control, not some passive index.
You like Tesla as a small-cap?
Great!
Hold on to it.
You aren’t forced to sell it based on some arbitrary investing rule.
Now, why do we keep bringing up Tesla as our example?
Because TECHNOLOGY stocks provided the GREATEST gains out of any sector in the last 20 years.
Just look at the largest companies in 2003 and now.
And there is no doubt we’re just getting started.
Generative artificial intelligence is an inflection point for humanity in the same way that the Industrial Revolution changed the course of history.
If you aren’t investing in high-growth technology stocks at their infancy, you’re missing out on opportunities that could change the course of YOUR LIFE.
The problem is… well… there’s a lot of garbage to sift through. Trying to find the hidden diamonds is a lot for an equity analyst, let alone a retail investor.
You need to grasp the technology, its potential and the business itself.
That’s what George Gilder does best.
George Gilder has been at the forefront of the LARGEST technological shifts in our lifetimes, spotting them well BEFORE everyone else.
Rather than play the big names rolling off everyone’s tongues, George looks for Moonshots — stocks yet undiscovered by the rest of the investing public… companies with the potential to revolutionize society.
We’re talking stocks that could go from market caps of several hundred million to BILLIONS!
We can talk it up all day.
But ultimately, the decision is yours.
