In 1973-74, stocks fell in half, peak-to-trough. At the time, it was the worst stock market bust since the Great Depression.

The 1973-74 bust has a lot in common with today’s bust.

So what worked in investing after the bust back then? One area of the stock market soared 20-fold back then… and right now, it’s completely ignored.

Today, I’m going to show you what that is and a few ways to buy it. But first, let’s take a quick look back at 1973-74…

Back then, we hit a long recession – just two months shorter than the current one. Stock prices dropped in half back then, just like in today’s Great Recession. The dollar was crashing, having just come off the gold standard. The price of gold soared threefold in 1973-74. And commodity prices nearly doubled.

[ad#Google Adsense]What happened next? What happened starting in 1975 as we exited the recession?

You’d be surprised…

Gold crashed nearly in half, bottoming out in mid-1976 near $100 an ounce. Commodity prices had their worst performance of the 1970s, also. After a nice bounce in stocks in 1975 (similar to the bounce we got in stocks starting in March 2009), the stock market went nowhere for the rest of the 1970s.

So stocks, gold, and commodities all did nothing, at best. But there is one little-mentioned segment of the stock market that went absolutely nuts…

That segment was smaller companies.

If you had invested $10,000 in stocks ranging in size from $25 million to $100 million, it would have turned into over $100,000. If you had chosen even smaller stocks – under $25 million in market cap – $10,000 invested would have turned into over $192,000. Said another way…

You’d have made 20 times your money in a basket of the smallest microcap stocks, coming out of the 1970s recession.

And it turns out, this wasn’t an isolated incident…

I looked at every recession going back to 1950 (as far back as I have data on smaller stocks). If you’d bought small stocks during the year the recession ended and held for three years, you’d typically have made a 91% gain.

Coming out of nine recessions, you never would have lost money.

Your biggest gain, as you might think, was coming out of the worst bust. That was a 167% gain after the 1973-74 bust.

The last recession before the most recent one was mild, and it ended in 2001. But still, tiny stocks soared… A basket of small stocks returned 120% for the three years from the start of 2001 through the end of 2003. In that same time, the S&P 500 fell 12% and the Nasdaq lost 18%.

The message is crystal clear… after a bad recession, you want to own small stocks – the smaller, the better.

So where are we? We know microcaps soar after recessions. We know the tiniest ones can do ridiculous things – like go up 20-fold in eight years after the 1973-74 bust.

But so far, after the Great Recession, microcap stocks haven’t exploded – yet. They’ve done fine, just nothing exceptional. Since the start of 2009, a basket of small stocks has performed in line with the S&P 500 and has underperformed the Nasdaq. The total return is around 30%.

Microcaps have a history of strong outperformance after recessions. Just under triple-digit gains are the norm, over a three-year holding period. So you haven’t missed anything yet.

To spread your risk across a basket of microcaps, you have a handful of microcap funds to choose from, including the PowerShares Zacks MicroCap Fund (PZI), the First Trust Dow Jones Select MicroCap Fund (FDM), and the iShares Russell Microcap Index Fund (IWC).

The story is simple… When a recession is near its end, you want to own small stocks. The easiest way to do it is through one of these funds.

Good investing,

— Steve Sjuggerud

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Source:  Daily Wealth