Big bets may pay off – if you bought Google when its initial IPO became available in August 2004 you made 1,400%. And this was shortly after the Internet bubble of 2000. Everyone wants big gains but they are not common. Your best bet is to diversify your portfolio. But do it smartly to get the highest return possible and still get a shot at some of those high flyers.
With fears in 2016 of stock market volatility, many are suggesting to buy gold and collectibles like gold coins. An instant way to get instant diversification is by buying an index fund like the Dow Jones or S&P 500 ETFs. These baskets of stocks though are cap-weighted – you end up owning more of the biggest companies within the basket – in the S&P 500, Apple has a market value or “market cap” of ~$607 billion and is given a higher weighting of 3.25% of the index compared to Mattel with a market cap of $11billion and a .06% weighting.
By buying equal weighted index funds, you get better returns with the same risk. For example in the current bull market, the S&P equal weighted fund rose 282% compared to 200% of the cap weighted funds. Equal-weighted means that every stock in the S&P 500 has the same weight in the index — 0.20%. Big stocks and smaller stocks are treated equally. In a bull market, most stocks are going up. So the equal-weighted index goes up more than the market-cap-weighted version because in many cases smaller stocks will make sharper, faster moves higher than larger stocks.
You definitely want big stocks in your portfolio. But you want newer, fast-growing stocks that can zoom up like Google too. If you use smart diversifying tools such as an equal-weighted index fund, you get the best of both worlds — the safety of big stocks and the growth of newer, smaller companies all in one.
An example of an exchange-traded fund (ETF) for the S&P 500 that use equal weighting is the Guggenheim S&P 500 Equal Weight ETF (NYSE Arca: RSP). For diversification among 1,000 companies, there’s the PowerShares Russell 1000 Equal Weight ETF (NYSE Arca: EQAL).