Sound Stock Investment

One strategy that people believe is defensive but can result in large capital appreciation is investing in blue chip stocks. Generally, blue chips are considered companies that have been around for decades and are often listed in the Dow. Examples of ‘blue chips’ would be GE, Exxon, and Bank of America.

If the examples above didn’t trigger a gut reaction, then you should probably pay more attention to what has been occuring in the stock market. ‘Blue chips’ was often associated with financial stocks, which over the past couple years are down as much as 95% or more. So much for safety!

It’s true that some defensive stocks have weathered the stock market collapse better than others. Consumer staples, stuff like toothpaste and toilet paper, are often considered blue chips. Companies like Kimberly Clark and Campbells Soup are not down as much as the general market. While you may think these stocks should be considered ‘blue chips,’ please remember that just because they did not suffer as much as the others during this collapse does not necessarily mean they should be considered safe, capital-appreciation stocks.

Many have suggested that tech heavy-weight Google should be considered a blue chip. Google’s market cap alone suggests strength (of course, so did Citigroup’s). As we know though, tech companies often have wild swings in earnings and valuations.

There is no such thing as true blue chip investing. If you think of blue chip as ‘consumer staple,’ then your portfolio is woefully undiversified. If you think of blue chip as just ‘large company,’ we have seen that large does not necessarily mean safe.

When it comes to stock investments, there is always risk and reward. The only way to mitigate risk across sectors is diversification, which means holding a variety of stocks, both large and small companies, in different sectors.