Cynthia Yang Article Q3 2025 Frank Talk Newsletter

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How Market Cap Can Contribute to Portfolio Volatility

If you invested in only large-capitalization U.S. stocks over the past couple of years, you may have seen your account balance rise precipitously. The S&P 500 index returned 26% in 2023 and almost 25% in 2024. Although the Russell 2000 index of small-cap stocks also made excellent grades in those years (19% and 13%, respectively), they weren't as astonishing. It should be said that this stock market performance is unusual by historical standards. However, a distinct divergence by market cap isn't.

Large-, small- and mid-cap stocks can perform differently in the same market conditions. It's one of the reasons investors are usually advised to diversify their investment portfolios by market cap. In other words, you'll almost certainly incur more volatility if you only buy the so-called "Magnificent 7" giant-cap tech names.

Sizing Up Stocks

Market cap is the total dollar market value of a company's outstanding shares of stock. For example, a company with 100,000 shares selling for $10 each has a market cap of $1 million. A company with 10 million shares selling for $100 each has a market cap of $1 billion.

In general, companies with market caps greater than $10 billion are considered large-cap. Mid-cap companies have market caps between $2 billion and $10 billion, and small-cap companies have market caps under $2 billion. Apple, the largest company in the world as measured by market cap, is worth approximately $3 trillion. NVIDIA and Microsoft aren't far behind.

History Says

Historically, large-cap companies (which tend to be more mature) have offered more stable returns but limited growth potential. Small-cap companies have typically offered greater growth potential but less stability. Mid-cap companies, not surprisingly, have tended to fall somewhere in the middle.

But as the last few years have shown, some large-cap stocks are capable of enormous growth — and enormous volatility. That's at least in part because other factors, including industry, specific company characteristics and macroeconomic forces, help determine a stock's performance. Investors don't complain when these stocks are on the upswing. But the story's usually different if all stocks in a portfolio plunge in tandem. This is when some inexperienced investors may panic-sell at a loss.

Customized Diversification

No diversification strategy can completely protect your portfolio from market volatility, including the risk of financial losses. However, diversifying across market caps, as well as by industry, style, type of security and country, can help cushion your overall portfolio from dramatic price swings. Contact your financial advisor to discuss diversification strategies customized to your particular investment goals.

© 2025

Important Disclosures

Investment advisory services are offered through Planned Financial Services, LLC, dba Return on Life^® Wealth Partners, an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.

The views expressed are current as of the date of publication and may change without notice. The strategies and concepts discussed in this article are provided for informational purposes only and may not be suitable for all individuals.

Investing involves risk, including the possible loss of principal. This article does not constitute individualized investment advice. Individuals should evaluate their own circumstances and seek guidance from qualified professionals — including financial advisors, attorneys, or tax advisors — before implementing any strategies discussed.

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