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Is enough of your portfolio invested in small caps?

FY18 was a great year for the S&P/ASX Small Ordinaries Index, it went up by over 24%! Of course, not every year will be that strong but it shows how quickly small businesses can ramp up returns compared to the slow-moving giants like Commonwealth Bank of Australia (ASX: CBA).

Resources, technology shares and China-related businesses all got big boosts in the small cap world. I doubt resources will be able to repeat that trick again. But the other two could keep growing strongly in the coming years.

It’s the small cap area where the blue chips and mid-caps of tomorrow will be found. Every business started off as a small one. One bank branch, one software developer or one outlet over time became multi billion dollar businesses.

Unless you know you’re going to die within the next few years I believe everyone should be going for long-term growth. Quality small caps is the best place to find that growth in my opinion. It is much easier to double a business worth $250 million compared to doubling a business worth $25 billion.

Not every business will turn out like Altium Limited (ASX: ALU), Afterpay Touch Group Ltd (ASX: APT) or a2 Milk Company Ltd (ASX: A2M). But, for some reason many retail investors ignore the small caps. Those businesses are too small for many fund managers.

I wouldn’t say that I’m an expert in small cap investing. That’s why a portion of my portfolio is invested in quality small cap fund managers like WAM Microcap Limited (ASX: WMI). However, I do have a few small cap investments like Paragon Care Ltd (ASX: PGC) and Duxton Water Ltd (ASX: D2O) that aren’t high-risk bets. Small doesn’t necessarily mean speculative.

Foolish takeaway

Be aware that small caps are even more volatile than their larger counterparts. As with all types of investing, you just need to think about the long-term. In a decade’s time, how much will this business likely grow? Hopefully a lot.

I’m not suggesting 100% of your portfolio should be in small caps. But, maybe at least some of your portfolio, perhaps 10%, should be in smaller businesses.

Our Motley Fool experts have identified 3 hot small caps that could be a great fit for your portfolio.

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Motley Fool contributor Tristan Harrison owns shares of Altium, DUXTON FPO, Paragon Care Limited, and WAM MICRO FPO. The Motley Fool Australia owns shares of A2 Milk, AFTERPAY T FPO, and Altium. The Motley Fool Australia has recommended Paragon Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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