There are no guarantees in the stock market, but there are investments that have stood the test of time and have proven to hold up better than others during times of uncertainty. If you’re looking for some sense of “stability” during these times, look no further than these stocks every portfolio should include.
Although there’s no one definition for what a blue-chip stock is, it’s generally accepted that they are well-established, cash-cow companies that are leaders in their industry and household names.
Companies such as Starbucks, Microsoft, and McDonald’s would be considered blue-chip stocks, for example. Starbucks and coffee are becoming synonymous, Microsoft could be considered the original tech powerhouse, and McDonald’s is as recognizable of a brand as any company in history.
To even receive the title of a blue-chip stock, a company’s track record must be top of the line. This doesn’t mean everything is always peachy keen with the business, but it does mean they have the financial resources and brand to weather almost any bad economic storm. This is important during times of uncertainty because the long-term stability (relative to smaller, lesser-known companies) that can come with blue-chip stocks is hard to duplicate.
You don’t want your whole portfolio to be blue-chip stocks, but they should definitely be a staple. For companies to become blue stocks, they had to go through a lot of growth, and as an investor, there’s a lot of money to be made in this growth. If your portfolio is all blue chip stocks, you won’t hold any younger companies with hypergrowth potential. Companies like Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA) had to start somewhere — and they’ve made a lot of people rich along their journey so far.
There is a risk/reward trade-off with investing. Stocks are riskier than bonds, but have virtually unlimited earning potential. Within stocks themselves, there is also a risk/reward trade-off based on company size. Smaller companies have much more room for growth in their business, which generally means there’s more room for growth in their stock price. However, with this growth potential comes higher risk because smaller companies have fewer resources.
Large-cap companies, defined as companies with a market cap of at least $10 billion, may not have as much room for hypergrowth in their business, but due to their size, they often have way more resources to keep the business afloat despite broader economic conditions.
This is important for long-term investors because rough periods in the stock market are inevitable, and you want to feel comfortable treating them as an afterthought because you believe in a stock’s long-term potential.
The stability of large-cap stocks is why people tend to gravitate toward them during bear markets when prices are dropping.
You can’t go wrong with funds
The good thing about blue-chip stocks and other large-cap companies is that you can invest in them using exchange-traded funds (ETFs), which can help spread out some risks.
Many ETFs are available that focus specifically on large-cap companies, with one of the most popular being the Vanguard S&P 500 ETF (NYSEMKT: VOO). The S&P 500 is an index that tracks 500 of the largest public U.S. companies. S&P 500 index funds are very low-cost, have lots of diversification, and have provided respectable long-term returns (roughly 10% annually). You can also find your fair share of ETFs that only contain blue-chip stocks, but the funds are usually put together by professional investors, so they tend to be on the more expensive side.
You also want to be sure you don’t abandon the small players altogether during periods of uncertainty. The Russell 2000 is considered the go-to benchmark for small-cap stocks, and although it usually underperforms the S&P 500 during bear markets, it tends to outperform it in the early stages of a bull market, making down periods a good time to scoop these stocks for a “discount.”
You may not want to take on the risk that comes with investing in individual small-cap or mid-cap companies, but investing in a well-diversified ETF containing those companies is still a good move. You always want to give yourself a chance for the growth potential that comes with smaller companies.
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Stefon Walters has positions in McDonald’s and Microsoft. The Motley Fool has positions in and recommends Microsoft, Starbucks, and Tesla. The Motley Fool recommends the following options: short October 2022 $85 calls on Starbucks. The Motley Fool has a disclosure policy.