Don't Ignore Small-Company Stocks

Small-company stocks have a lot going for them. Since 1926, they have returned an annual average of about two percentage points more than shares of large companies. Over time, that two-point difference adds up. A dollar invested in a basket of small caps in 1926 would have returned more than five times as much as a dollar invested in large caps.

Of course, there's a trade-off. Higher returns are the reward you get for taking on greater risk, and small caps are riskier than large caps. Shares in smaller companies are naturally more volatile because their businesses lack the financial resources of big firms. A new competitor or a failed product can put them out of business.

In recent years, small caps have developed another vulnerability. As index investing has grown more popular,