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Why you should include penny stocks in your portfolio

by , 30 September 2015

You may have heard that penny stocks beat the rest of the market's performance. Do you believe it?

Of course, it's not a guarantee that penny stocks always outperform the rest of the market at any given time, but over the long run, they do.

Let's take a closer look…

The outperformance of penny stocks

Research shows that investing in penny stocks, in other words small-caps, beats the performance of the rest of the market over time.

Whilst returns may fluctuate when you look at specific periods of time, over the long run, penny stocks outperform their stock market counterparts.

Professor Elroy Dimson and Professor Paul Marsh of the London Business School periodically research the small-cap market.

Their research shows that by investing in the smallest companies for the long-term produces the best returns by far. The smaller the company, the better the potential return.

For example:

  • £100 invested in the FTSE All Share Index in 1955 would now be worth £82,000.
  • £100 invested in the smallest 10% of the market in 1955 would now be worth £494,600.
  • And £100 invested in the smallest 2% of the market in 1955 would now be worth a whopping £1.1 million.

As you can see from above, the returns are better the smaller the company.

The risks are greater with penny stocks, but so are the rewards

By taking on higher risks to invest in penny stocks, the potential to make larger returns over the long-term is greater.

Whilst it wouldn’t be wise to invest your whole portfolio in penny stocks, it makes sense to have exposure to penny stocks in your portfolio.

The percentage you allocate to penny stocks is up to you. You need to consider how much risk you’re happy taking on.

So there you have it. Why you should include penny stocks in your portfolio.

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Why you should include penny stocks in your portfolio
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