Companies that are large with solid earnings increasing over time and long histories are considered to be “blue chip” in nature. The theory behind investing in such companies is that you will hopefully get regular stock price increases and/or dividend increases but there won’t be much risk. The term comes from casinos where the blue colored chip has the highest value.
Should you invest in blue chips stocks?
In reality, the performance of large, stable companies isn’t necessarily better than that of the entire stock market. The problem is that a large, stable company today might not always be in that category. For example here is a link to a 1955 article about General Motors (GM) and how well the stock was doing. Admittedly, 55 years is a long time but there are plenty of other examples of companies that went from being “blue chips” to “cow chips” in less time than GM did.
Stick with passive investing
Whenever you invest heavily in a certain type of stock – whether it’s blue chips, small companies, specific industries then diversification is a problem. Your risk level will actually go up by investing in less companies even if those companies are less risky than most other companies. Buying broad-market index funds is the best way to maximize diversification – it won’t eliminate market risk (ie if the entire market goes down 40%, so will your investment) but it will reduce the effects of betting your dollars on individual stocks.
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