Large-Caps Not Always Best

When it comes to protecting your investments, bigger isn't always better. Just because a company is large and its stock popular, doesn't mean it's necessarily the best investment for you. Ray Hennessey, editor of SmartMoney.com has some advice when it comes to big companies.

Most people are told to invest in big stocks you can find, even Hennessey has offered suggested it. "But it's always important to remember that's not always where you're going to get the best returns," he explains.

As an example, looking at five of the most widely held stocks, GE, Microsoft, Pfizer, Wal-Mart and J&J have all gone down or are flat for the year to-date. And over a five-year period, Microsoft and Pfizer have taken huge hits. "When you think about it, you've got to think after size and after dividends, are these companies positioned well, do they have some operational problems," Hennessey says.

When you begin to invest you have to develop a selling discipline. "You never really make money unless you sell the stock," explains Hennessey. "You buy low but then you sell it high. And you have to know where you want to sell."

If you were holding onto one of the five most widely held stocks over the past five years, you probably should have sold it before now. "People who want safety may want to look at mid-cap stocks, maybe even dip your toe in small-cap stocks," says Hennessey.

"The future of the market is you are probably going to see those large-caps which haven't done well continue to not to do well," Hennessey predicts. "And you are probably going to see the smaller companies do better." But he warns that small-cap investments can be extremely risky. It may not be a smart idea to drop an investment in Microsoft for a small company that may not make any money.

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by Jenn Eaker