Small caps have done well during the economic downturn, in comparison with large cap companies. One of the reasons being the fact that small caps generally experience steeper declines early in a recession due to a flight to safety that naturally occurs, resulting in oversold conditions and undervalued small- and mid-cap stocks.

The other reasons being that smaller companies tend to get a performance boost when merger and acquisition activity increases, which is common toward the end of a recession when valuations become more attractive and larger companies look for ways to grow their businesses.

Having said that small cap and penny stocks are extremely risky and can be highly volatile. Hence an investor needs to research the market and the companies comprehensively before investing

The economic turndown has resulted in a number of new concepts and situations that did not exist during the time when the economy was booming. Ideas such as liquidity risk were largely unheard of, but in the last few years it has been an important factor that investors and businesses alike are getting more concerned with. The risk associated with selling any financial asset increases in these tough times. The amount of money that could be lost when liquidating parts, or an entire portfolio, is generated due to there being a difference between the price at which the financial asset is marked and the price at which it can be sold. The task of portfolio analysis becomes even more important in a down turn; an investor needs to ensure that he has a diversified set of financial assets in the portfolio.

Including small caps and penny stocks in a portfolio can mitigate the risk that some bigger investments may bring. I also agree that the market and all investments needs to be well researched before any decisions are made.