If you are a small scale investor, you should go for small cap stocks. This is basically because you are more likely to make more money if you have a large number of stocks. Since you do not have the capital to buy plenty of large cap stocks, your best bet is to target small cap stocks. You can even add some penny stocks to your portfolio because this will increases your chances of making profit. These are great theories and these theories work most of the time. Over the years, some stock market investors have modified these theories by investing in small cap ETFs. Now, there is nothing wrong with this move because investing in Exchange Traded Funds can help reduce your investment risk. The problem is that the good run seems to be over for small cap stocks. This is why it is time to reduce your allocation to small cap U.S stock ETFs.

Before we go further, there are important questions that we have to answer here. Have investors made money from small cap ETFs in the past? Yes, they have. Are investors still making money from small cap stocks in the present? The correct answer to this question is; not any longer. This brings us to another question. If investors made money in the past from small cap ETFs, how come they are no longer making money now? The truth is that there are many reasons to reduce your holdings in small cap stocks and some of these reasons are explained below.

The first reason is that the stock market has cycles. For some years, small cap stocks ETFs enjoyed a good run. These low price stocks were beating the large cap stocks ETFs for years but these days, the reverse is the case. To put it simply, small cap stocks are no longer paying the investor so it is time to reduce your holdings.

Another reason for the poor run of small cap stocks is that the economy is picking up. Remember that when the economy is depressed, investors have less capital to invest so they target small cap stocks to get more value for money. When the economy improves, investors have more capital so they can invest in the relatively safe high cap stocks. Well, this is exactly what has happened. Investors have more capital now so they can afford to buy large cap stocks and this is what they are buying.

Finally, small cap stocks may offer higher returns if you get the timing right but these stocks also come with more risk for the investor. For instance, the chances of bankruptcy are higher with small cap stocks. It is safe to say that many investors have decided not to take unnecessary risks with small cap stocks so you should adopt this attitude too. If you have a large portfolio of these stocks, it is time to reduce your allocation to small cap U.S stock ETFs.