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If Big Stocks Let You Down, Think Small

An index-based approach is more desirable, especially for the average investor, Smith says.

"There's just no way that the layperson or person on the street could pick a small-cap stock every single time that would be a winner," he says. "You run the risk of losing everything, but you also have the potential of gaining everything."

Investing in an index avoids tease highs and lows to find a safe, comfortable return in the middle. As Smith puts it, "the turtle wins the race."

"A lot of people think that small-cap stocks are like Billy's Bake Shop, with three employees, and he's doing good if he makes his rent payment," Smith says. "But that's not a small cap. That might not even be a micro-cap."

Ways for retail investors to add small caps to their portfolio include iShares' S&P Small Cap 600 Value Index Fund (VTI). Smith recommends a look at the Vanguard Total Stock Market ETF VTI for those who are unsure of a proper allocation. Its mix of large, mid and small caps allows you to "grab some of that small-cap exposure at a cost of less than 20 basis points," he says.

Vanguard also offers "completion indexes" of small and midcap stocks that complement large-cap holdings, such as the Vanguard Extended Market ETF (VXF).

Gunderson stresses that one shouldn't necessarily avoid large-cap stocks completely. There are still good buys to be had. It is up to investors, however, to research them, and not just go with names that resonate.

"You can find the best large caps of today. You don't have to necessarily go down to the small cap," he says. "For instance, Caterpillar (CAT - Get Report) is one of the most phenomenal large caps in the market today ... and it is not that expensive. Over the last 10 years, the market has gone nowhere, it is flat. But Caterpillar has averaged 20% a year in returns during that same time. Wal-Mart (WMT - Get Report) has gone nowhere for 10 years, yet Dollar Tree was up 60% in 2008, even at the height of the recession."

-- Written by Joe Mont in Boston.

>To contact the writer of this article, click here: Joe Mont.

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