Most people know that stocks are important for building wealth over time. When stocks are part of a smart financial plan, they have helped many investors reach their money goals throughout history. But this raises a key question: which types of stocks should you choose? While most people and news outlets focus on the biggest companies, there are many other types of stocks that can help create a well-balanced investment portfolio.
When people talk about “the stock market,” they usually mean the S&P 500 or the Dow Jones. The S&P 500 is a list that follows the 500 biggest public companies in America, ranked by their total value (called market capitalization). The Dow only includes 30 very large, well-known companies. Both of these lists focus mainly on companies that are based in the United States.
Because of how these lists are built, they only show the biggest U.S. companies. This helps us understand how the overall stock market and economy are doing, since the largest companies drive most trends. But when building your own investment portfolio, these lists might miss other good opportunities. This is especially true now, when just a few “mega cap” stocks – including those in the Magnificent 7 – have been the main reason for both gains and losses in the market.
In today’s market, how can investors look at more options? Small company stocks and international markets are two areas that can offer new opportunities and help spread out risk. Each has different features and potential benefits that can make your portfolio stronger, especially when markets are unstable.
Small company stocks have performed poorly but offer variety
Small company stocks (called “small-cap” stocks) represent businesses worth a few hundred million to a couple billion dollars. This is much smaller than mid-size and large companies that are worth tens to hundreds of billions, and mega companies that are now worth trillions of dollars.
The Russell 2000 index, which tracks small company performance, has made 5.0% per year over the past ten years. This compares to 10.5% for the S&P 500, as the chart shows.1 This gap has been especially large in recent years as the market has become more focused on large and mega companies, particularly in technology and artificial intelligence sectors. Small companies typically have less connection to the technology sector and make more of their money from business within the United States. This makes them more affected by changes in U.S. economic policies and trade rules.
Small company stocks have struggled this year because of ongoing concerns about trade policies and economic growth. However, this has made their prices more attractive. Small company stocks are currently trading at more reasonable price levels compared to large company stocks. The Russell 2000 currently has a price-to-earnings ratio (a measure of how expensive stocks are) well below its 10-year average. Even more notable is the price-to-book value of about 0.8x, much lower than the historical average of 1.2x. In comparison, many of the S&P 500’s value measures are well above average, if not near all-time highs.
Interest rates also affect large and small companies differently. Small companies often rely more on loans with changing interest rates than their large company counterparts. This makes them more sensitive when interest rates go up or down. While this created problems when interest rates rose quickly starting in 2022, the more stable environment since then could help. This is especially true if the Federal Reserve continues to lower rates later this year.
Many of these measures suggest that small company stocks are priced more attractively than many other parts of the market. While large companies will continue to be important in many portfolios, this shows there are opportunities in other areas of the market too.
International markets continue to have attractive prices
Another area with attractive prices is international stocks. These are usually divided into two main groups: developed markets (like Europe, Japan, and Australia) and emerging markets (including countries like China, India, and Brazil). These categories reflect differences in how mature their economies are, how their markets work, their government rules, and more.
While U.S. stocks have led global markets for much of the past decade, international stocks have done better this year. The MSCI EAFE index, which tracks 21 key developed market countries, has gained about 17.5% so far this year when measured in U.S. dollars. The MSCI EM index, which tracks emerging markets, has risen 10%.2 This has happened despite global uncertainty about trade.
Not only have these markets performed better this year, but the price differences remain large. While the S&P 500 trades at high price-to-earnings ratios, international markets offer more attractive prices, as shown in the chart above. This is partly due to political and economic challenges in many of these regions over the past ten years, some of which have begun to improve.
One key difference between investing in the U.S. and internationally is that currency changes can affect your returns. When you invest in foreign stocks, you’re also affected by how the value of foreign money compares to the U.S. dollar. The weaker dollar has created good conditions for U.S.-based investors. This is because foreign investments increase in value when their currencies get stronger, allowing them to be converted back to more dollars. This currency boost has been a meaningful contributor to the strong performance of international stocks this year.
It’s important to spread investments across regions and company sizes
For long-term investors, keeping some money in areas like small company and international stocks can help create more balanced portfolios. This is especially true after the significant performance of large company stocks, which have been driven by just a handful of the largest companies.
This doesn’t mean that U.S. large companies will become less important. This is also not a suggestion to make big changes to well-built portfolios. Instead, maintaining long-term portfolios is about holding the right mix across all these types of investments. By including more attractively priced parts of the market, we can potentially improve long-term results and take advantage of market opportunities. While any single type of investment may perform poorly during certain periods, their different characteristics and return patterns can provide valuable variety over time.
The bottom line? While the S&P 500 and Dow remain important measures, investors should consider the benefits of spreading money across many other parts of the market, including smaller companies and international stocks. Holding appropriate portfolios for the long run is still the best way to achieve financial success.
1. Russell 2000 and S&P 500, price returns, from January 2, 2015 to May 23, 2025
2. MSCI EAFE and MSCI EM, total returns, January 1, 2025 to May 23, 2025
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