When you want to diversify your portfolio, you must consider many different classes of investments. One of those classes is mid-cap stocks. These stocks tend to behave differently than other investments. They can be volatile, and some mid-cap companies fail. But they also can experience explosive growth. Companies whose total shares of stock have a value between $1 billion and $15 billion qualify as mid-caps. Consider how to add that growth potential to your portfolio.
Stocks vs. Bonds and Cash
To choose a percentage of your investments for mid-cap stocks, first decide how you will divide your overall portfolio. You might consider stocks as your largest money commitment, while looking at bonds and cash as a haven for a smaller percentage of your allocation. This gives you stocks' opportunity for growth, and the relative safety of bonds and cash.
Allocation Between Classes
Consider some allocation models that spread out your risk. You could put 60 percent in stocks and 40 percent in bonds and cash. If you can tolerate more risk, consider 75 percent in stocks and 25 percent in bonds and cash. Note that even an aggressive allocation reserves some of your portfolio for safer investments.
Allocation Within Classes
Once you have chosen a percentage for stocks, break your stock category down even further. You can start with 50 percent of your stocks in large-caps, 30 percent in mid-caps, 20 percent in small-caps. Adjust from there according to your risk tolerance. For example, if you want more growth, you could go with 40 percent large-caps, 40 percent mid-caps and 20 percent small-caps. Note how much risk you have taken on in the last model. You have 60 percent of your stocks in higher-risk investments if you count mid-caps and small-caps together. This example has only 40 percent of your stocks in mid-caps.
Even with a high percentage of your holdings in high-risk stocks, your overall risk remains fairly low. This is because you allocate part of your investments to cash and bonds. In our aggressive example, with 75 percent of your portfolio in stocks, and 40 percent of stocks in mid-caps, you still risk only 30 percent of your total portfolio on this asset class.
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