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Blue chip investing refers to buying stocks in large, big-name companies that have established themselves as big players in their respective fields.
But is it possible to invest in too many blue chip companies? And if so, why is this?
In this article, we’ll explore these questions, and more. Scroll down for all of the details, or click on a link to head straight to a specific section…
While there’s always risk involved when you buy equities, loading up on blue chips is at the lower end of the riskiness scale. That’s because blue chips are organisations with proven business models and, because of this, are usually enormously profitable.
While the definition isn’t set in stone, for a stock to be classified as a blue chip it generally needs to:
In addition to the above list, many blue chip stocks have a reputation for being generous with dividend payments. One of the reasons for this is because blue chip firms are usually mature, meaning they’ve most likely surpassed their peak level of growth. This means they’ve the so-called luxury of being able to distribute payments to investors, as opposed to needing to re-invest every penny back into the business.
That being said, there are exceptions to this rule. Amazon, for example, famously follows a policy of not paying dividends to its shareholders.
Blue chip stocks are popular among investors, especially older or more risk-averse investors, mostly because they’re seen as reliable.
Blue chips rarely offer surprises, especially when compared to shares in smaller companies operating in emerging sectors which can be more volatile. And while blue chip stocks can decline in value just like any other asset, blue chips have a undeniable reputation for ‘bouncebackability’. You only need to look at the performance of the likes of Amazon, Alphabet (owner of Google), and Microsoft over the past few years for evidence of this.
More generally, for many investors dividend-paying stocks can provide a decent level of cover against market downturns. Remember, owning dividend-paying stocks gives two opportunities to increase your wealth: through capital gains and, of course, regular income payments. For more on this do take a look at our article that explains how to choose high dividend shares.
To give some examples of blue chip stocks, here’s a (non-exhaustive) list of firms that have passed the blue chip test. (You might recognise one or two!)
Your age, financial situation, investing goals, and personal tolerance for risk are all important factors worth considering to help you determine whether you’ve too many, or not enough, blue chips in your portfolio. Of course, some investors may prefer to swerve blue chips entirely.
Let’s take a closer look at each of these important factors…
If you’re a young investor you may wish to consider the impact of investing in too many blue chips. That’s because young investors, by definition, have more time on their side than older investors.
Think of it this way… younger investors essentially have a licence to take on more risk in order to chase higher returns as they’ve the luxury of being able to ride out any short-term bumps along the way.
For older investors, however – especially those in, or nearing retirement – it’s easy to see the attraction of blue chip stocks. That’s because, as we’ve covered above, blue chips rarely surprise so they can be a decent asset to hold for older investors who don’t have an appetite or the time, for unpredictable volatility.
If you’re in a strong financial position, then its possible you’re comfortable with the thought of taking calculated risks in order to grow your wealth. If this applies to you, then you may be inclined to dodge blue chips in favour of more volatile stocks, with the potential for higher returns. After all, if you’re in a strong financial position, a sudden, steep downturn is unlikely to impact you as much as someone who is less financially fortunate.
On the flipside, if you want to invest but your finances aren’t the healthiest, then you may wish to cushion your portfolio with a collection of blue chips. That’s because a hefty proportion of ‘reliable’ blue chips should help to limit exposure to risk – a sensible approach if you don’t have much of a financial buffer to speak of.
Regardless of your age and financial position, your personal tolerance for risk should play a big part in helping you determine whether or not you should load up on blue chip stocks.
Risk-averse investors may opt for a lot of blue chip investments, while risk-seeking investors may prefer a lower exposure, or none at all. For more on this, take a look at our article that covers the importance of risk tolerance in more detail: What is asset allocation? And why is it important?
Are you looking for a way to earn passive income? Are you investing for the long-term, or do you only see yourself investing for a few years? Why are you looking to invest in the first place?
Your answers to these questions will ultimately help you set your personal investing strategy. This is vitally important as having your financial goals in order can help you determine how to put together a portfolio that closely aligns with your interests. See how to create your investing strategy in 5 simple steps.
Remember, no form of investing is without risk. Even a portfolio consisting entirely of blue chips or other lower-risk assets may fall in value.
Yet while you cannot eliminate risk entirely, sticking to defined investing strategy and making an effort to diversify your investments will go a long way towards it.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. Companies listed above are not necessarily endorsed by Money Magpie. When investing your capital is at risk.