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Investment Myths - Myth 3: Just Invest in Blue chips

Updated on December 30, 2016

Myth 3: Just Invest in Blue Chips

A ‘blue chip’ is a term or status given for large, leading companies, with high market values (generally in the billions of dollars). Blue chip companies or corporations are nationally and internationally recognised as well-established, financially stable and have shown consistency in performing steadily within the economy. Blue chip companies generally deliver dividends in all market conditions, and blue chip shares (shares from blue chip companies) are regarded as less volatile, more stable and safe.

Today, leading blue chip companies in the US include Apple, Microsoft, Coca-Cola and Wal-Mart Stores. In Australia, these include Commonwealth Bank, BHP-Billiton, Telstra and Rio Tinto. However, as with all shares, there is no full guarantee of security. Blue chip shares are also bound to change. Various companies that frontline the economy 20 years ago as blue-chip corporations no longer hold blue-chip status.

An instance can be seen from the graph below. Newcrest mining (NCM) one of Australia's biggest gold mining companies, was seen as a steady performer back in 2011. In 2011, the share of the company was traded at $40 However within three years, the stock shrank below $10.

Likewise, Fortescue Metals Group (FMG) one of Australia biggest iron production companies experienced immense decline from over $20 billion in market capitalization to $5 billion within 5 years.

It wasn’t just these seemingly stable, blue-chip corporations that suffered turning points. Washington Mutual which was America’s largest savings and loan association and 6th largest bank in the country, collapsed in 2008 and was seized and sold off to JPMorgan Chase; General Motors corporation which had the third highest global revenues among automakers filed for bankruptcy protection in 2009; and Dell,one of the world’s largest technology companies needed to be sold off privately in a leveraged buyout deal in 2013. In addition, many blue chips shares are expensive and can be low yielding too. So clearly, blue-chips may not always be ideal for everyone.

What should we really do is continually attempt to find the rising stocks and eliminate the weaker stocks in your overall portfolio. They key is cutting off every branch that bears no fruit, while pruning and feeding every branch that does bear fruit so that it will become even more fruitful. Therefore, a sensible “pruning” and constant reviewing of your assets performance is essential to maximise your profit since resources are always limited.

It’s essential to continue on-going research instead of a one-off research and to monitor your portfolio on regular basis continuing to replacing the stocks that are not performing with better stocks. A strong ability to analyse and a sharp skill set is very important! Please continue to follow us as we continue our next topic of when to take profit!


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