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URL:  http://boards.fool.com/i-used-etfs-for-my-us-small-cap-asset-allocation-30512964.aspx

Subject:  Re: On second thought, 2828 - Small Cap Issue Date:  1/29/2013  12:14 PM
Author:  lowstudent Number:  668928 of 756860

I used ETF's for my US small cap asset allocation both to diversify away as much risk as I could, and to save time studying stocks. Though IWO and IWN have done very well over the last decade or so, tracking their indeces admirably, I think I'm ready to do a little more work, take a little more rick, and shoot for slightly better returns.

The question is this: how many individual positions should one take within a small cap allocation? HG holds a whole ton of tiny positions and many on the boards seem to lean toward "big" numbers (say 20-30 positions) as well. I think the risk can be managed with 10 or fewer within that asset class.
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10 or fewer small caps?

That is an extremely risky portfolio, large cap and small cap stocks are very different animals

A sector allocation based on 10 stocks in the small cap arena is a very aggressive stock picking portfolio choice. Yes this is a very valid way of chasing return, but if you are already retired chasing return more aggressively in an already risky sector is something to do with eyes very widely open

10 small caps is not remotely diversified, you can have 10 small caps within an industry and barely be diversified within that industry. That's what makes them so able to generate return, as well as what makes them risky something goes right -- return == something goes wrong -- loss -- small caps do not have alternate lines of business to prop the stock in an industry problem or a production problem.

Realize you are moving more toward gambling with this sized allocation.

I would personally lean toward a using my toss away money to bet one or two well researched small caps and go with a small footprint to goose returns and maintain the bulk of my exposure through ETFs

Remember rish=return if you are saying to yourself well I can make a killing...... there is always a reason that there are not a lot of other folks in the market of an easy killing.
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