Large-company U.S. stocks have been delivering impressive returns in recent years, outperforming their smaller counterparts. However, experts are highlighting the potential benefits of diversifying into small- and mid-cap stocks. These stocks are currently trading at bargain prices compared to their larger counterparts and have historically shown strong performance over the long term.

According to the S&P indices, the S&P 500, consisting of companies with a median market capitalization of over $31 billion, returned an annualized 13.6% over the past five years. In comparison, the S&P Mid-Cap 400, with a median market cap of $5.6 billion, returned 9.7%, while the S&P Small-Cap 600, with a median market cap of $1.5 billion, returned 7.7%.

One of the key advantages of smaller stocks is their relative affordability. As investors continue to bid up the prices of large-cap stocks, smaller stocks can be purchased at attractive prices. Currently, small- and mid-cap stocks trade at a roughly 30% discount to large-caps, with both indexes trading at about 14 times estimated earnings for 2024, compared to a ratio of about 20 for the S&P 500.

Furthermore, smaller stocks are trading at a discount relative to their historical average. Midsize stocks are trading at a 14% discount, while small-company stocks are trading at a 19% discount. This relative attractiveness suggests that either large-caps are overpriced or smaller stocks are undervalued, creating an opportunity for investors.

Historical data supports the case for small- and mid-cap stocks. An analysis by index provider MSCI found that small-cap stocks outperformed large firms over 15-year periods about 9 in 10 times. Similarly, data from Invesco showed that mid-caps outperformed both large- and small-caps from November 1991 through September 2023.

While smaller stocks come with greater volatility, they offer growth potential as these companies have room to expand and potentially become market leaders. Financial planners recommend having a diversified portfolio, with a significant portion invested in large-company U.S. stock mutual funds or exchange-traded funds. However, investing in funds that own small- and mid-cap stocks can provide exposure to potential long-term gains.

Jeremy Straub, founder and CEO of financial advisory Coastal Wealth, emphasizes the importance of participating in the success of the U.S. economy at all stages of a business's lifecycle. Investing in smaller stocks allows investors to be part of the growth journey, from small-size companies to market-leading multinationals.

Experts advise investors to consult with their financial advisors to determine the appropriate allocation of small- and mid-cap stocks in their portfolios. While larger stocks offer stability, having a mix of large and small companies allows investors to capitalize on market dynamics and potentially generate higher returns.

In conclusion, the current market environment presents an excellent opportunity to diversify into small- and mid-cap stocks. These stocks are currently available at a discount compared to larger stocks, and historical data suggests that they have the potential to outperform over the long term. By including a mix of small, mid, and large companies in their portfolios, investors can position themselves to capitalize on different market conditions and maximize potential gains.