Risk tolerance is an important aspect of the investor psyche. Each individual should consider how much risk they're willing to accept in their share portfolio and often the 'sleep at night' test is the best indicator of whether you're taking on more risk than you're comfortable with.
High-Risk Small Caps
In my fairly small portfolio of companies, I try to allocate between 30% and 40% to companies with market capitalisations below $1 billion. I usually take small positions between $2,000 and $4,000 on each stock depending on my level of confidence in the business.
I take this approach because I believe these smaller companies will provide superior growth over the medium term and also have the potential to provide huge dividends over the long term.
3 Risky Small Caps
For those investors able to handle greater volatility in their portfolio, here are three of my favourite small cap stocks that I either currently hold or am looking to purchase soon:
Freedom Foods Group Ltd (ASX: FNP) has a market cap of around $500 million and is leveraged to the growing wealth of the Chinese middle class, as well as health-conscious developed countries. The group is a specialist producer of gluten and dairy free cereals and snacks to Australia and the US, as well as the manufacture of long life milks to the Chinese market.
Ozforex Group Ltd (ASX: OFX) has a market capitalisation of $560 million and is in the business of providing smaller customers with an affordable and convenient way of transferring money between countries and currencies. This growing market is dominated by the big banks, however OzForex is providing a disruptive low-cost offering that appears to be gaining traction.
Finally, $260 million market-cap Capitol Health Ltd (ASX: CAJ) is a medical company with huge potential. Capitol is attempting to consolidate the non-hospital diagnostic imaging market in Australia. The company invests in Australian medical clinics that offer magnetic resonance imaging (MRI), CT scan, X-ray and ultrasound services. The company currently has around 50 clinics in Victoria and will hopefully start acquiring clinics in other states within the next 12 months.
