Investors overlook the Russell 2000 Index, but it can be a good way to add diversity to a portfolio. The Russell 2000, commonly known as the RUT, is a benchmark index that tracks some 2.000 small-cap companies. Experts say that some investors overlook this index, as its stocks are often more volatile. But there can be rewards with small-cap companies.
"Small stocks should be included in any well-diversified portfolio," says Justin Halverson, co-founder of Great Waters Financial, a Minneapolis-based financial planning company. "Small company stocks inside and outside the US have generally outperformed large company stocks over time."
What is the Russell 2000?
The Russell 2000, established in 1984, is comprised of small-cap companies ranging in market capitalization between $ 300 million and $ 2 billion. Shares in the Russell 2000 are determined annually by the FTSE Russell, which divides the 3.000 largest stocks in the US market into the Russell 1000, a basket of the 1.000 largest stocks, and the Russell 2000, the 2.000 smallest stocks.
"The Russell 1000 covers about 90 percent of the US market at full value, while the Russell 2000 covers the next 10 percent," says Halverson.
More diversified than the S&P 500, the top 10 holdings in the Russell 2000 account for only 3 percent of the entire index compared to the S&P 500, where the top 10 holdings account for more than 20 percent.
Since small-cap stocks are primarily companies based in the United States"Exposure to global growth and geopolitical issues such as trade disputes is more limited," says Stephanie Lewicky, senior manager of futures and currencies at TD Ameritrade.
Russell 2000 Small Cap Business Advantages
An advantage of small-cap stocks is that these companies can outperform large caps. Recent data published in the "Stock, Bonds, Bills, Inflation (SBBI) Yearbook" shows that small-cap stocks returned 12,1% annually between 1926 and 2017 compared to large-cap stocks, which returned 10,2%. , XNUMX% per year during the same period.
Halverson says one of the reasons these companies have outperformed large-cap stocks could be that investors demand a higher return to invest in small stocks.
"For example, would you demand more interest to lend your money to a local hamburger restaurant or McDonald's (ticker: MCD)?" He says.
Small companies tend to have more advantages than large companies due to their growth potential.
"McDonald's is more difficult to double in size than a local hamburger restaurant," says Halverson.
Small-cap companies have the ability to double or triple in size, says Bryan Bibbo, financial adviser at The JL Smith Group in Avon, Ohio.
"Most large caps were once small caps, but they have grown over the years to have a larger market capitalization," he says. "Everybody wants to go back in time to buy Apple (APPL), Amazon (AMZN) or Microsoft (MSFT) before they were household names."
Russell 2000: Why Small Cap Stocks Are Bypassed
Small-cap stocks are often overlooked as an investment because fewer securities analysts and financial journalists cover this area. The financial media focuses on the world of large caps, reporting on the performance of the stock market in general citing the S&P 500 index and the Dow Jones Industrial Average, according to experts.
One of the reasons investors focus less on small-cap companies is because these companies are not as well known as large companies, Halverson says.
The relatively small size of the companies means that most are not household names, says John Iammarino, president of Securus Financial, a San Diego-based financial planning firm.
Buying and selling shares on the stock market is the best way to make investments, but in many cases we do not know when is the best time to enter or exit the financial equity markets. To approximate these operations there is the so-called target price of the stock market values. It's about a level or rating that is given by a professional and that serves as a reference source to carry out or not the operation depending on your needs in the investment sector.
Ultimately, the target price of a share is the price what an analyst of the financial markets estimates, that is, what in his opinion the share of a company should be worth. In this sense, it can become a support in which to shape your decision from now on. But in any case, it is convenient that it is supported by other sources of information that can be considered reliable. As for example, those derived from technical and fundamental analysis. So that in this way you have a broader vision of what the financial asset you are going to buy actually is.
It is true that it is a fairly common strategy for small and medium investors to opt for this reference source. They look for the target price assigned by the professionals to show if it is a good time to buy or sell the shares in the financial markets. In particular, those who have less learning in this kind of operations that they want to do to make their savings profitable. Beyond another series of technical considerations and perhaps also from its fundamentals.
Target price: can we trust it?
The first aspect to which we must refer is that we are first of all before an estimate in the conformation of the prices of the securities of the stock market. This means that these predictions are not confirmed in all cases. Not much less as you will know at that time. It can happen perfectly that the actions have never reached this level in prices. There are many examples on this scenario in the equity markets and that have caused some people to have lost a good part of their monetary contributions.
On the other hand, another of the most relevant characteristics of what the target price actually is is that it is very flexible. In other words, it is not always the same and varies depending on the reviews usually carried out by financial entities or analysts. With ups and downs that can be very intense and to the point of get closer to 10%. To the point that they get to disorient a good part of the small and medium investors who do not know what to do with so many changes in the target price of the stock market values.
Strategies that can be carried out
In any case, there are systems that serve to operate with the information of the target price within the equity markets. If, for example, shares have been bought below target price assigned by the professionals, you can wait until it reaches these levels to finalize the operation with the corresponding capital gains. But there is a sensible risk of missing a significant upward stretch in the chosen proposal. When it can also happen that after a few days or weeks these prices are revised upwards and it gives us a very little positive feeling about this parameter that we have used to invest in the stock market.
While on the other hand, there are many times the values that have been trading for many years above the assigned price. And in this scenario, we have not opted for any movement in the equity markets. Therefore, the best solution to avoid unwanted scenarios is be much more flexible in assessing the importance of the target prices of the shares. Because it is true that they can make us earn a lot of money in operations, but also that we lose a lot of euros along the way.
Indicates an upside potential
Its best contribution lies in the fact that it is a good parameter to indicate the revaluation potential of a financial asset. In this sense, there is no doubt that if the target price is above the actual listing price, implies that there is a potential for appreciation and the recommendation is probably to buy your shares. While on the contrary, if the target price is below the real price of quotation, it actually means that it has a very important bearish journey.
The biggest problem that small and medium investors have is that the different analysts of the financial markets almost never agree on the target price. In some cases they even present divergences that are worth mentioning and that eventually lead to a widespread confusion on the part of stock market users. To the point that they do not know what to do in each of the moments when they have to make a decision about their investments. It is not surprising, then, that in some cases they do not even pay attention to this aspect and opt for other models in stock market analysis, such as technical analysis.
Determined by banks
One of the aspects to be anticipated is that in the end it is generally many banks and securities firms that carry out analyzes of companies in order to determine a target price for their shares. They may be interested parties in this process in which prices are formed, for one reason or another that does not come up now. And that can lead small and medium investors to take the wrong decision. Because, in addition, the evolution in the price of the shares depends on another series of factors that are very relevant. Where the reviews always arrive late to the ears of small and medium investors.
On the other hand, it must also be considered that if the company is listed at 20 and the target price is 30, it is interpreted that the value is cheap and therefore it is a buying opportunity that we should not miss. And just the opposite in the divergent case in which we will say that the shares are very expensive and we must not waste money in an operation that in the end will not be profitable. The points of view on the target price are therefore diverse, they have a double premium in the investment strategy to be used from now on.
Stock market analysis
Another aspect that we must look at from now on is that which has to do with the underweighting or overvaluation of the stock market values themselves. Well, in this sense, it is necessary to emphasize that a good part of financial institutions and securities firms regularly conduct business reviews that are publicly traded. In which they are assigned a target price that causes the listed company to be overvalued or undervalued. But it should be emphasized, on the other hand, that this assessment should only serve as a guide, since they are not absolutely reliable. If not, on the contrary, it serves as a support to the decision that retailers will have to make to buy or sell their shares in the equity markets.
While on the other hand, it is very common to find news such as the following in the media: Morgan Stanley has lowered its target price that it sets for Banco Santander securities to 4 euros, from the previous 6 euros. This fact can disrupt all our investment strategy and in a way harm us. In particular, if we have carried out the operations before having carried out the reviews. Because it must also be taken into account that these revisions in the target prices can be continuous and progressive. So the effect on our investment portfolio can be more than important.
Buy and sell on supports
On the other hand, there are other parameters that are much more credible to carry out operations in buying and selling shares on the stock market. For example, through the gaps, which in general is usually defined as the area or price range in which no operation has taken place. Or through the levels in support and resistance they almost never fail their predictions. Beyond other considerations of a technical nature and perhaps also from the point of view of its fundamentals.
In any of the cases, it is a personal decision that only you can execute since, after all, it is the one you are risking the money with. But that you have different possibilities to choose an entry and exit model in the stock market values. Where each one uses their own strategy with a single objective that is none other than to make the money invested profitable, which is, after all, what is involved in these cases. And where the target price also plays its role.