Small-cap stocks not for timid

If you’re considering an investment in small-cap stocks, let tolerance for drama be your guide.

If watching your stock lose 20 percent of its value in one day would give you heartburn, small-cap stocks are not for you. If you are unwilling to scour quarterly reports for phrases like “material weakness,” they’re not for you. And if you can’t sell when a stock’s price and outlook are sunniest, this isn’t your investment.

Small caps, loosely defined as stocks with a market capitalization between $180 million and $1.8 billion, have never looked better. The Russell 2000, the broadest small-cap stock index, has nearly doubled since 2002 and on Monday hit its highest point since its 1988 inception, before slipping slightly later in the week.

For the quarter ending June 30, small-cap growth funds led all U.S. diversified mutual funds in returns, with a 3.77 percent return, according to data provided by Lipper Inc. But two of the three very worst performers were also small-cap funds. One lost 25 percent for the quarter, the other lost 11.79 percent.

Of the stocks in the Russell 2000, seven have been delisted this year alone, including Winn Dixie Stores Inc. and Tower Automotive Inc.

The increase in small caps isn’t uniform, said Howard Silverblatt, equity market analyst at S&P. “You have to be selective about what you’re doing.”