Blue-chip stocks a viable investment option

Timing a crucial factor to maximise returns

IF you are thinking of building wealth amid mixed economic signals and market volatility, investing in blue-chip stocks may be an option.

It is normal to be nervous and there is a need to weigh the possibilities of a recession or even a stagflation environment before investing.

Timing is indeed a factor when investing in stocks and experts would say stock market downturns are actually opportunities to invest to increase wealth over time.

“Now is always the ‘best’ time to invest, for most people, because of the time value of money. Centuries of asset price data have shown that time ‘in’ the market, which each of us can control through discipline, is more important than trying to time the market, which no one can do consistently well.

“For most people, I would say it makes sense to invest now and to stay invested through good and bad times,’’ said Manulife Investment Management (M) Bhd’s licensed financial planner Rajen Devadason

Warren Buffett is one of the many investors globally who invests during downturns. To him “bear markets are the best time and opportunity to buy good companies at reasonable prices.’’

During the Asian financial crisis in 1997 and 1998, Anna (not her real name) dumped RM80,000 of her savings into several bluechip stocks.

She did not bother looking at it for several years. Nearly a decade later, her investment paid off as it was worth RM800,000.

There are many others who have gained by investing during bear markets in blue chips but it requires a buy-and-hold strategy and perseverance till markets turn around.

Is this the right time to invest in blue-chips stocks?

“The market now is generally down which makes it a good opportunity to invest but not limited to only blue-chips,’’ said IPPFA Sdn Bhd licensed financial planner Kimberly Law. She said blue-chips are generally stable. “It is for you to buy to hold and not trade frequently. But a lot depends on an investor’s profile such as risk appetite, time horizon and objectives and goals,” she said.

Devadason added, “As with all things in life, when we are faced with the choice of buying goods or services of lousy quality or great quality, it is wiser – and cheaper over the long haul – to opt for higher quality items.

“This is especially true in the realm of investing. As such, owning high quality equities, also known as blue-chip stocks, is wise.’’

Which blue-chip stocks will give you higher returns?

Going by Buffett’s philosophy, a report said, it is to “identify fundamental value in a company’s long-run competitive advantage, along with several other criteria.’’

There are a large number of blue-chip stocks listed on Bursa Malaysia and other global stock markets. It is about identifying the “bluest of the blue’’ to invest in and for that you need to do some homework.

Devadason said economic fundamentals are very difficult to overcome.

Companies, nations, and regions rise and fall on the quality of people leading them.

“So, I would recommend choosing bluechip equities, in the form of high-quality funds or, for those with the rare requisite stock-picking skills, individual listed companies that operate in demographically healthy environments, particularly in countries with low corruption levels, and that focus on businesses well-positioned to continue growing for decades to come,’’ he pointed out.

Both Law and Devadason also believe investors should have a diversified portfolio and not just stick to blue-chip stocks.

“Never put all your eggs in one basket,’’ said Devadason.

He told his clients to diversify their saving and investment portfolios across three different dimensions of diversification, namely asset classes; across different geographic regions; and across a long timeline.

Law added, “Blue-chips are neither good nor bad. They have their advantages and disadvantages. Sometimes, blue-chips can be better or worse than other stocks in some aspects.’’

Stock investing in bear markets is not for the faint-hearted and the money you put aside to invest to create wealth should not be meant for your monthly expenses or emergency funding.

Devadason said investing is always for the long-term.

“However, the shifting realities of our lives are such that we all have short-term, medium-term and long-term goals.

“When we drill down deeper into the bedrock of the human life cycle, we should not solely rely on narrow investing principles but also upon broader financial planning,’’ he noted.

Bear in mind that a recession can have an adverse impact on the earnings of the majority of companies and apart from appreciation in stock value, most blue-chips pay out yearly dividends to their shareholders.

No one can also accurately and consistently predict the markets and as a report said, “War, inflation, government policy changes, technological change, corporate performance, and interest rates all can cause a market to go up and down.’’

Devadason said, “There is no way of predicting when individual stocks or funds that are jam-packed with such great investment building blocks will choose to soar. In general – stay as close to fully invested as is possible, given short-term cash buffering needs and opportunities to retire loans.’’

There are also many ways to build your wealth chest and blue-chips is an option, but “this is not a recommendation as with any investment comes its own risks.”

“For most people, I would say it makes sense to invest now and to stay invested through good and bad times.” Rajen Devadason