How safe are Blue Chip stocks?

[Frustratedlady]

What are the pluses and minuses of investing in them?

I've been in mutual funds for years, but was impressed with a couple BC stocks. I'm just apprehensive because I don't know that much about them.

[True Dough]

1. If you purchase a basket of them

you improve your odds of doing better over the long-term. You also could select ones that pay dividends, so you'll receive small quarterly or annual payments.

Really depends on your investment timeline. If you have a window of at least several years, you should do fine. But the markets have been frothy and there could be a crash in a year or two. Impossible to predict timing, but cycles always occur.

[Frustratedlady]

2. How do they normally act? What is different about them?

I usually reinvest any dividends and don't sell. I was impressed with a couple that did very well over the past 5 years and thought I'd try them out. It probably wouldn't be me cashing them in anyway, but my family after I'm gone.

Just curious if it was a bad idea unless I was filthy rich?

[Tomconroy]

3. Individual stocks are always risky

Unless you are talking about maybe Berkshire Hathaway. Even the professionals have a hard time picking the winners. I do think a good bet is to invest in low cost index funds for the very long term. Get rich slowly. The exception for me was an investment in a health science sector fund. Vanguard has a good one. I long ago came to the conclusion that baby boomers would spend fortunes trying to live forever. Since about 1990 it has averaged over 14% per annum. But I would never try picking individual stocks.

[Frustratedlady]

4. Ironically, I picked 3 stocks in 2019 and all 3 did well...one at over 14%.

Other than those 3, I've always gone mutual funds. Given the pandemic, I thought I was lucky. Just feeling a little daring, I guess.

[PoindexterOglethorpe]

5. There's a reason they're called Blue Chip stocks.

Generally speaking, they will be a good investment.

[MichMan]

6. You just don't know anymore

Traditionally blue chip stocks were seen as safe reliable companies that had proved their profitability over time and provided steady dividends.

That may still be the case, but after GM declared bankruptcy in 2009, I was stunned as I never expected anything like that could ever happen. When I was younger their was talk that the government might force them to break up to not create a monopoly.

[A HERETIC I AM]

7. They are called "Blue Chip Stocks" for a reason.

And that reason is they are generally large, well established companies that weather the good times and bad, and are profitable over the long term.

I tend to look at these issues thus;

How different would our world or our lives be of there were no Proctor and Gamble, for instance? Or 3M or GM or GE (although GE has struggled seriously in the last few years and was actually removed from the Dow 30 industrials, the last of the original 30 when that happened) or Boeing, etc. etc.

Some could argue that we would not see a difference or that it would be an improvement, but I think there are certain advantages to having large companies providing goods and services that can stick around and not suffer serious losses every time there is a downturn.

There’s a difference between a “Large Cap” stock and a Blue Chip as well, and that is mostly longevity. Tesla is certainly a Large Cap stock, but it hasn’t been around nearly as long as General Motors (even though GM has had bankruptcy in the past) and does not have the production capabilities as Ford or The VW Group.


The pluses in investing in such issues is their ability to weather stormy seas. The minuses are the same with all individual issue stock investing.

Ever heard of Woolworths? General Railway Signal? Victor Talking Machine? Those were among the 30 original Dow Jones Industrial Average of 30 Industrial Stocks. Large companies can and do go out of business, go bankrupt or get absorbed.

Since the common wisdom is to broadly diversify a portfolio when it comes to investing, and since none of us has a crystal ball in which to see the future, the average or casual investor is typically better served by purchasing a collection of such issues, either via a Mutual Fund, an Exchange Traded Fund or any of the other methods of accessing such markets available to the retail investor.

Having said all that, there is certainly nothing wrong with buying individual shares of a company with which you have a favorable opinion. Just try and do your own due diligence, understand the risks involved in purchasing such securities, and as the old saying goes, don’t put all your eggs in one basket!

Good luck, and may all your trades be net gains!

[progree]

8. If you consider the much higher volatility of an individual stock as compared to broad-based

Last edited Sun Mar 21, 2021, 11:37 AM - Edit history (1)

indexes as being "safe", then yes, they are "safe". My definition of safe is probably a little different.

The best known blue chip index (the Dow 30 Industrials) fell 89% from peak to bottom in the Great Depression, and it took 25 years to get back to their 1929 peak. The worst individual stocks in that collection of 30 did much worse. (And the best individual stocks did much better).

Then it took 16 years for the Dow to regain where it was in 1966. Again, the worst individual stocks in that index did much worse. (And the best individual stocks did much better).

The S&P 500 did a little better in that period -- for example, in November 1968 the index stood at 108.37. Nearly 14 years later, in August 1982, it stood at 101.44. Again, the worst individual stocks in that index did much worse. (And the best individual stocks did much better).

A foreign example: The Nikkei 225 fell from 38,916 on 12/29/1989 to 7,055 on 3/10/2009, an 82% decline, and, after more than 31 years still has not gotten back to its 1989 peak. Again, the worst individual stocks in that index did much worse. (And the best individual stocks did much better).

There is a meme circulating that since 1970 in the U.S., one only had to wait 7.5 years or less for the S&P 500 to recover, because we've learned to control these things now. And as for them Japanese -- well they are different, you know what I mean wink wink (They also, at least post-WWII, have never elected an obviously evil madman or had their legislature overrun by a mob, so I'm not sure being "different", wink wink, is a bad thing).

I remember the same thing being said about collateralized debt obligations in the 2000's -- there had never been a time since the Great Depression when the U.S. overall average housing prices went down, so because the CDO's were geographically diversified, we didn't have to worry our pretty little heads off about frothy housing prices. Because a U.S.-wide housing price drop never happened (ahem, since the Great Depression) so it never will because we are so much more sophisticated than we were back then. (Its a contradictory combination of looking to history for validation, while at the same time saying things are different now)

The trouble with memes is that enough people start believing them, and use them to justify ever higher valuations. Now we're in the "you just have to wait 7.5 years or less in the worst case to get back your money" memedom, to justify ever higher P/E ratios. That cycle will eventually come to an end, and great cycles rarely end gently.

As far as the meme about the S&P 500 recovering in 7.5 years or less after 6 bear market crashes (pullbacks of 20% or more), that's not a very statistically strong argument, being based on a sample size of 6. And it applies to a collection of 500 stocks. It most certainly does not apply to any individual stock -- again, indivdual stocks are more volatile than the aggregate of a large collection of stocks.

[lastlib]

9. Some statistical guidance*:

(*to be taken with the usual grain of salt...)

An investment's "safety" is really a function of its *risk*--"risk" being defined in the investment world as the *probability of loss*. To get an estimate of an investment's risk, a good place to start is with its basic MPT (Modern Portfolio Theory) statistics:

--Sharpe's Ratio, the comparison to the 90-day T-Bill, the theoretical "risk-free" investment.

--Beta, a measure of its volatility, ie, how much does it fluctuate relative to an index like the S&P500 (the preferred index for large-company stocks) or the NASDAQ Composite (a gauge for medium- to small-company stocks).

--R^2 (R-squared), a measure of how much of the asset's movement relative to an index is "explained" by the movement of the index itself. In short, this tells you how sensitive the asset is to the movement of the market as a whole.

--Price/Earnings ratio tells you how many periods (years) it would take for the company's earnings to repay the purchase price of the stock. Lower P/E ratios imply that the company has better earnings relative to its price, so it could in theory "repay" its price more quickly than a company with a higher P/E ratio. This is greatly simplifying it, and you might want to dig a little deeper into understanding it.

There are others, but these give you a good place to start in evaluating an investment. Find more info here:
https://www.investopedia.com/financial-term-dictionary-4769738

[Frustratedlady]

10. Thank you to all who replied.

I'm looking at this carefully and hope to make a decision within the next week. I appreciate all the advice and will refer back to it before I jump. Never too old to learn.