When should you invest in small cap vs large cap?

As we are approaching 2026, my student asks me - when should I invest in small caps given large caps are so high? What about international markets?

Currently, the market is high

Not just for US, but for Asia and Europe as well.

Large caps are high mainly due to the AI bubble which makes you feel like you should pursue smaller "unnoticed companies."

This is exactly the trap I fell into in the last market cycle.

This causes me (and potentially you) to find "hidden gems" when the market is high and find small companies to invest in.

The problem with small caps is that - it generally drops faster than large cap when we are in a bear market.

Large caps can drop and they will recover most of the time

The key difference between large-cap and small-cap is that small-caps can drop and never recover.

This is why during good times, you can invest in small caps for a short term momentum play but not to invest in small caps hoping they will survive the bear makret (becasue they usually don't).

Instead, you should find small caps once you observe and see the bear market ending.

Then and only then, should you find great small caps with good fundamentals and strong momentum to invest in.

Large cap is my bread and butter because I know it will come back and recover given enough time while there is no such "promise" for small caps.

Cheers,

Eric

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Eric Seto

Chartered Professional Accountant (CPA)

Chartered Investment Manager (CIM)

Founder of 5MinInvesting.com

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