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2013 is turning out to be a year of double-digit gains and dreary dips for the stock market, keeping the majority of investors on their toes wondering what’s next. The FED’s see-sawing between cutbacks and maintained stimulus has caused stocks, bonds and commodities, that run in tandem with decisions of this magnitude, to yoyo significantly, all in all it hasn’t been your run of the mill Q2. But for most global investors the markets are starting to feel sanguine, and why not, the frantic pace seems to be coming to a halt, and well, there are still the blue chip companies, feet planted firmly in the ground rising at their own pace.
So the question beckons, are blue chip equities a good approach? Well, firstly, as the comparison to bonds is usually the norm, the former are historically cheaper, and if the ‘near death experience’ of the global financial system is behind us we can now contemplate a rocky path to normalisation, a path that seems to suggest that equities should increasingly form part of our portfolios.
Unsurprisingly I’m an equity investment manager primarily focused on blue chip equities; meaning I like the large, stable household names. This doesn’t mean I blindly follow equities and would unseeingly choose them over other forms investments but I shall offer some strong reasons on how to go about choosing the right Blue Chip companies to invest in.
Rule Number 1: Always pick a firm that is increasing its market share and steer away from those that are losing it. Market share increase or decrease is a strong indication of the relative competitiveness of the company's products or services. Take BMW for example. This firm’s focus on emission technology has meant that cars are cheaper to import in many countries, consequently a dramatic increase in BMW’s may be seen on roads globally. In the meantime, the share price has increased over 150% since the crisis.
Rule Number 2: Do not compare bond yields with dividends but compare them with earnings per share over price. Johnson & Johnson, the US pharmaceuticals company, have recently paid a dividend of over 2% annum, managing to increase dividends year in year out. 2% per annum does not compare favourably with bond returns, but what one should consider is that this 2% is only a part of what JNJ are earning. The company is constantly yielding around 5.5% per share on an annual basis and with such consistency that it puts any investment grade security to shame. Investors have been rewarded with a yearly divided and earnings that have been translated into a steady increase in price over time that is over 8% on an annualized basis.
Rule Number 3: Never get too attached to an investment. Investments are about making money so set a stop loss limit and if your investment touches that number swallow your pride, get out and don’t look back. It will be tough, trust me, but in the long run it pays. Make sure that you have a balanced portfolio not an accumulation of single assets, diversify your portfolio! Investments are bound to disappoint from time to time but as long as your investment portfolio is within your target, one asset gone bad should not be a problem.
Now before you start head first into the world of investments remember another thing: take care of the money you have worked so hard to earn. Make sure that you have carefully weighted the risks and you are investing according to what you can afford to invest. Seek advice from professionals you trust or otherwise look for an investment in a fund that is professionally managed and has a solid track record. And my final golden rule: heed advice only from those that are ready to put their money behind their advice.
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