What percentage of a diversified portfolio should large cap stocks comprise?

The percentage of a diversified investment portfolio that should consist of large-cap stocks depends on an individual investor's investment goals and risk tolerance.

Diversification of an investment portfolio essentially consists of spreading investments out into different equities and/or into different asset classes, such as stocks and bonds.

Diversification is enhanced by holding some investments that have a negative correlation with other held investments. With negatively correlated investments, an investor can reduce overall volatility and risk by virtue of the fact that some investments will perform better when other investments experience a downturn.

A classic diversified portfolio consists of a mix of approximately 60% stocks and 40% bonds. A more conservative portfolio would reverse those percentages. Investors may also consider diversifying by including other asset classes, such as futures or forex investments.

Beyond simply a mix of stocks and bonds, diversification can be further enhanced through an investor holding a combination of large-, mid-, and small- or micro-cap stocks.

Large-cap stocks are generally considered safer investments, since they typically represent large, well-established companies that are expected to continue as profitable businesses. However, large-cap stocks usually offer less potential for high growth and returns than mid- or small-cap companies.

This is not always necessarily the case, since some large-cap firms, such as Google or Verizon, still offer excellent potential returns because of their presence in high-growth market sectors. Smaller market cap stocks usually come with both higher profit potential and higher risk levels.

The optimal mix in equities that an investor chooses is ultimately guided by individual investment goals and risk tolerance. Investors aiming for higher returns and willing to accept higher risk typically devote more of their portfolio to mid- and small-cap stocks, while more conservative investors maintain a higher percentage of large-cap stocks. A typical mix for the average investor is approximately 50 to 60% large-cap, and 20 to 30% for mid- and small-cap stocks.