Fact: shares in Commonwealth Bank (ASX: CBA), Westpac Banking Corporation (ASX: WBC) and CSL (ASX: CSL) are up 4%, 5% and 1.5%, respectively, in 2014. Representing an average return of 3%.
Fact: My stock picks for January, February and March are up 62%, 1% and 166%, respectively. They are Global Health (ASX: GLH), Collins Foods (ASX: CKF) and LNG Limited (ASX: LNG). Representing an average return of 76%.
To put the returns in perspective, not including dividends and brokerage, if you put $3000 into the small-caps, you'd need to put around $76,000 into the blue-chips to make the same amount of profit.
What would you prefer?
I'm not writing this to blow my own trumpet because picking short-term market fluctuations is a fool's (lower case 'f') errand. I've been fortunate (lucky if you will) the short-term market gyrations have played out the way they have. However I'm trying to illustrate the power of the risk/reward relationship in the stock market and its ability to change your life.
Sure, small-caps stocks aren't for everyone and I can only imagine what would've happened to their share prices if we witnessed a GFC-like market correction in the first few months of 2014. Then again, I can only imagine what would've happened to the big banks as well.
Having a well-diversified portfolio is essential for investors looking to mitigate risk but also maximise the chances of a decent return. For risk-averse investors, perhaps those in retirement or with an investment timeframe less than 5 years, small-cap investments can be tough to justify.
The S&P/ASX Small Ordinaries' (ASX: XSO) (^AXSO) 11% return over the past 5 years illustrates the need to be patient. Especially when compared to the 39% return of the S&P/ASX200 (ASX: XJO) (^AXJO).
Three small-caps I've got an eye on
If you're like me, i.e. in the "accumulation" phase of your financial life and willing to accept your portfolio may drop 30% in value in one year (or are even prepared to lose your initial investment altogether), then you should keep a close watch on these next 3 stocks.
1. Yellow Brick Road (ASX: YBR) is the junior diversified wealth management business steered by Wizard Home loans founder Mark Bouris. Trading at a moderately priced $0.65 per share, it has a very bright future ahead.
2. Bentham IMF (ASX: IMF) is a litigation funder for cases which exceed $5 million in value. It has a number of high profile Australian clients but its earnings can sometimes be "lumpy" given the nature of its business. However, with an impeccable record of success and growing international reputation, it deserves your attention.
3. Donaco International (ASX: DNA) is a junior casino and resort operator with its flagship project in Lao Cai, Vietnam. Its share price has dropped from over $1.50 to just $1.03 in the past two months. However its business model, strategy and long-term prospects remain untouched, meaning investors can stock-up for a cheaper price.
