A friend of mine says I should invest in small companies, as that’s where the best growth is.
Is this true? T. P., Bristol.
Early growth: Based on the past 20 years smaller companies have provided exceptional returns to investors
Paul Thomas, of Money Mail, replies: You might be tempted to go hunting for smaller company shares yourself, but you should be wary of this.
To begin with, finding successful small companies in which to invest is incredibly difficult.
You need to spend a lot of time researching individual firms to be sure you don’t pick a dud.
It makes sense to hunt instead for an experienced, successful fund manager to do it for you.
Based on the past 20 years, your friend is right: smaller companies have provided exceptional returns to investors over that time.
If you had invested £10,000 in a UK small companies fund 20 years ago, it would be worth an average of £67,000 today, according to investment firm Architas.
In the past year, small company funds have returned an average 18.7 per cent.
But past performance is not always a reliable indicator of future growth, and the next 20 years may not turn out as well.
Adrian Lowcock, of Architas, says: ‘Smaller firms can offer exceptional growth, but they can also suffer large falls, especially if the economy starts to deteriorate.’
So it is a good idea to dedicate only a portion of your portfolio to smaller company investments, rather than the majority.
Mr Lowcock tips Chelverton UK Equity Income, which has turned £10,000 into £18,232 in five years investing in the likes of Games Workshop and Mortgage Advice Bureau, the home loan broker.
Another fund he recommends is Franklin UK Smaller Companies, which has turned £10,000 into £20,552 over the same period.
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