Small cap stocks, or stocks whose market cap fall between $300 million and $2 billion, should always be part of a well-balanced portfolio for three key reasons.

One reason is the historical performance of small-cap stocks.

All thanks to strong financial performance and tax reform, which reduced the corporate tax rate on small cap stocks to 21% from 35%.

In addition, driving further interest into small cap stocks is the fact most are insulated from geopolitical issues, such as trade war fears.  Remember, small caps have much less exposure to international headaches than companies in the S&P 500.

Even better, small-cap stocks have a history of outperforming 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.

And, according to Smart Asset:

“Between 1979 and 2015, small-cap stocks in the Russell 2000 index outperformed large-cap stocks in the S&P 500 20 times within 37 years. In terms of the average annual return on investment, small- and large-cap companies’ stocks were virtually neck and neck, with the S&P 500 paying investors back 11.7% annually versus the 10.3% annual returns generated by the Russell 2000 index. In the long run, investing in smaller cap stocks may be just as profitable (if not more profitable) than investing in larger ones.”

Two, small cap stocks can offer better ground floor opportunities.

Institutions, for example, don’t often pay much attention and can’t invest in smaller companies without driving up the price.  This offers the average investor a good amount of opportunity, especially if we find one with a bright future, solid revenue and earnings growth.  For example, years ago, we spotted ACADIA Pharmaceuticals (ACAD) at less than $2 a share.  It was ignored for quite some time.  But as the benefits of its Parkinson’s disease Psychosis (PDP) came to light with FDA approval, the one-time unknown small cap ran above $50 a share.

Three, small caps help you diversify your portfolio.

We all know the saying ‘don’t put all your eggs in one basket’, but it’s essential to apply this rule when investing. Spreading your money across multiple assets means you won’t be depending too heavily on one kind of investment. If one of them performs badly, hopefully, some of your other investments might make up for these losses.

A diversified portfolio can include large and small companies, different industries or sectors, U.S. and overseas securities, bonds as well as cash.