Buying small-cap shares in a volatile market can be terrifying -- but in 10 years' time, you'll probably be glad you pulled the trigger.
The 1987 market crash was more surprising. The dot-com implosion was more severe. But to me, this market is far more frightening. As far as I'm concerned, this is the scariest stock market we've ever seen -- and that likely means it's a golden opportunity to make a lot of money.
Worse than Black Monday
On Oct. 19, 1987, in the US the S&P 500 shed more than 20% of its value. World stock markets followed suit. This sharp and sudden drop caught everyone by surprise -- and the experts still aren't sure exactly why it happened.
Just like ripping off a bandage, the pain was intense but short-lived; following a few aftershocks, the market resumed its steady ascent.
Worse than the dot-com crash
The bursting of the Internet bubble was far more prolonged and painful than the 1987 crash, but in this instance, investors had no one but themselves to blame. By paying premium prices for companies without an earnings history (or in many instances, a sensible business plan), investors set the stage for a spectacular correction.
The dot-com crash was brutal, but its wrath was primarily targeted toward tech companies. Between March 2000 and September 2002, Arm Holdings (LSE: ARM) lost 95% of its market value. Meanwhile, shares of boring old British American Tobacco (LSE: BATS) tripled.
That's exactly what makes today's market so scary. The problem isn't going away quickly, like the 1987 crash. The impact isn't restricted to a specific sector, as it was from 2000 through 2002. There seems to be no end in sight, and no safe place to hide.
And that's exactly why you should be thinking about buying shares.
No, I'm not taking crazy pills
Let me be perfectly clear: I'm not calling a bottom. In fact, I wouldn't be at all surprised if stocks continue to slide from their current levels. But I believe that shares of quality companies are trading at discounted prices because of the market's pessimistic mood, and people buying today will be very pleased in a few years. That's why I'm putting my available capital into this market with a grin from ear to ear, and I'm suggesting that you do the same.
Thanks to concerns over declining consumer spending, great companies like Vodafone (LSE: VOD) are trading cheap today. While the mobile communications giant has unquestionably been affected by the economic slowdown, this is a best-in-class business with the strongest brand name in the business. Short-term earnings growth has slowed, but the company's global footprint, affluent customer and exposure to fast growing markets like India, all mean Vodafone should be a long-haul winner from today's price.
However, I don't believe that the global mobile communications giant represents your best bet for new money today. Instead, I'm putting my money to work in the segment of the market where stocks have become outrageously cheap. I'm buying small-cap shares.
Smaller stocks, bigger returns
In volatile markets like the one we're seeing today, small-cap shares are often discounted disproportionately to the rest of the market. The reason is simple: Smaller companies typically have fewer competitive advantages and financial resources to weather a market downturn. When investors panic, they tend to flee to safety -- and in their minds, that means parking their spare cash in high interest savings accounts and buying stodgy large-cap stocks.
But over a 10-year perspective, if the returns of the best unit trusts in the UK smaller companies sector is anything to go by, smaller company funds have thoroughly outperformed larger company funds…
Best Performing Unit Trusts - UK Smaller Companies Sector Over 10 Years
| Marlborough Special Situations | +684.7% |
| Artemis UK Smaller Companies | +517.4% |
| BlackRock UK Smaller Companies | +273.9% |
| GAM UK Diversified | +215.9% |
| Fidelity Special Situations | +192.5% |
| BlackRock UK Special Situations | 157.5% |
Source: Citywire
Take a deep breath and buy
I know the idea of buying shares -- especially small-cap shares -- in a volatile market like this is terrifying. But in 10 years' time, you'll likely be glad you pulled the trigger.
> You can buy shares for £1.50 commission via the Motley Fool Sharebuilder share dealing service
> This article first appeared on our sister site, Fool.com. It has been adapted for UK readers by Bruce Jackson.
> Bruce Jackson doesn’t have an interest in any of the companies mentioned in this article. .
