The upside of blue-chip stocks
It’s easy to get caught up on the hot new exciting companies that always make headlines. But sometimes, the staid, boring blue-chips are smart assets to keep for the long term.
Unlike more celebrated stocks, such as Facebook and Apple, there are some blue-chips whose every move is not picked apart on Wall Street – and their Chief Executive Officer isn’t a household name like Mark Zuckerberg.
More than just price appreciation
Just looking at stock price appreciation is shortsighted. Everyone wishes they invested in Apple right before it released the iPod and eventually became the most valuable and profitable corporation in America. Apple’s price went up so much because word of new products drove the stock price higher. Until very recently, that was how Apple rewarded its shareholders. Stock prices rise on the expectation of a future share of profits.
Many other companies’ shareholders don’t get dividends either, because the companies need to keep their cash to continually expand (for most of its existence, Apple did not pay a dividend, as is typical for most tech companies). Mature companies don’t make the kind of news that results in huge price appreciation. They simply make sales and direct a large portion of their profits into the pockets of those who own the company.
Dividend investors can get rich just as easily as growth investors. But you have to maintain ownership over a long period to make it work. You must resist the urge to sell when crisis hits.
Also, no matter how mature the company is, generally speaking, no stock deserves more than 15% of your whole portfolio. Even giants like Lehman Brothers can go up in flames without anyone seeing it coming. Invest in the broader market to capture gems to achieve the returns you need for your retirement goals.
Be wary of the press
By picking up any financial magazine that reports on a company’s returns, you see examples that either beat or trailed their counterparts.
But investors who chase returns fall prey to the thinking that past returns are indicative of future results, when we know that that’s not the case. There’s no guarantee that the stock (or mutual fund or bond) will increase in value, and there’s no guarantee that it will decline. We just don’t know.
There may be a good chance that a top-returning stock is going to go down, although it may not happen right away. The reason is that when publications show companies with amazing returns, there are some people who flock to them, chasing returns. Prices temporarily increase.
What happens next is that a number of long-term investors in the fortunate stock sell – and they sell a lot.
Naturally, when there’s quite a bit of selling, prices drop, and so do the returns of those who jumped into the hot stock, expecting more increases.
Diversify & allocate
Rather than chasing returns, a wise choice is to invest broadly among asset classes and diversify accordingly.1 An excellent way to do this is through buying mutual funds of different asset classes (such as stock, bonds, real estate and international stocks and bonds). This helps you avoid chasing returns and helps you accept that certain asset classes will rise and others will fall.
But the combination of a large number of securities in one portfolio not only lowers overall portfolio risk, but also prevents an investor from chasing the next big stock whose lush returns already happened.
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- Diversification does not ensure against loss. Back
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