Jul '25 • General discussion
Why large cap better than small cap? It's a matter of strategy
1. Investing is about diversification (Think S&P 500)
2. Investing is about selecting great companies (Think Warren Buffett)
Both contradicting schools of thought are still perfectly valid in making money
So let's examine why.
Here's the return for the last 10 years:
NASDAQ 100: +17% per year
Top 100 companies in the world
S&P 500: +13% per year
Top 500 companies in the world
Russell 2000: +6.5% per year
Excluding the top 500, the small-cap 2000 companies
But we all know that there are people who made 5x, 10x, 100x on small cap
In other words, diversification works well on blue chip stable companies (e.g. top 100 companies in the world - which my investing strategy is based on)
It doens't work well on small-cap as the number of companies that goes bust is significantly higher. Hence diverisfication brings the return down to 6.5%
To achieve a high return with small cap, you would need to focus on stock picking because there are a lot of bad apples within the 2000 companies.
Whereas for blue chip, it is a lot more forgiving and diversification gives you a decent return.
Cheers,
Eric
Eric Seto
Chartered Professional Accountant (CPA)
Chartered Investment Manager (CIM)
Founder of 5MinInvesting.com
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Why large cap better than small cap? It's a matter of strategy
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