One of the key ingredients of a well-diversified portfolio are small-cap stocks.  Or, stocks that carry a market cap of between $300 million and $2 billion.  That’s because they offer diversification, the potential for higher returns, and long-term performance.

Reason No. 1 – Diversification

Small caps allow you to diversify your portfolio and lower your overall risk. This is important because the more exposure you have to various sectors and stocks with various market caps, the lower your overall risk.

Reason No. 2 – The Potential for Higher Returns

If you can spot quality opportunities, you can double, triple, even quadruple your money than if you were to buy a stock like Apple.

Look at ACADIA Pharmaceuticals (ACAD). In 2010, it wasn’t considered anything special at all at less than $1.25 a share.  What many didn’t realize at the time was that this biopharmaceutical company — focused on the development and commercialization of drugs that help address unmet medical needs, like Parkinson’s disease Psychosis (PDP) — was about to change everything for patients suffering from the debilitating disease.

At the time, the only treatment options for those with PDP were dopamine antagonist drugs, like clozapine and quetiapine – which could make motor symptoms worse, accelerate cognitive decline, and increase the chances of stroke or even death.

That’s the last thing PDP-sufferers needed.

So, when ACADIA found a way to treat PDP, patients and investors were excited.  ACAD would hit a high of $51.24.

These days, you’d never see returns like that with a stock like Apple. 

Reason No. 3 — Long Term Performance

For some history, small-cap stocks have outperformed large-caps, returning an average gain of 12% a year over the last 90 years, as compared to a 10% annualized gain on the S&P 500, as reported by Market Watch.