- Blue Chip and High Growth Stocks on Nasdaq - Wikipedia Commons
Are high growth stocks a better buy than the more stable blue chip counterpart? Much depends on your investing objective. Let's look at two sides of the issue.
The Argument for Blue Chip Stocks
The argument for blue chip stocks is that someone can invest and largely forget about it. A higher-quality stock should be able to produce a decent rate of return over the long term. At least that is what an advocate for the 'buy and hold' ideology would say. But is this actually the case? (If the blue chip also dispersed annual dividends the returns would obviously be higher)
If an investor bought blue chip company stock in 1975 for 10 dollars per share, the price would need to be worth 40 dollars and 14 cents by 2009 just to keep up with inflation as tracked by the Consumer Price Index. While many blue chip companies will vastly outperform these figures, many businesses will also dissolve into insignificance or go bankrupt. Who could have guessed the downfall of so many banks and automaker companies during 2008 and 2009?
The Argument for High Growth Stocks
On the other hand, promoters of high growth stocks investing will point to stocks such as Google that soared to seven times its IPO price in under four years. The counter-argument would be if someone timed their entry and exit wrong, they could lose half of the investment in just over one year on the very same stock. Volatility is dangerous.
So which is a better investment?
The Tale of Two Methodologies
An investor who does not wish to actively manage his portfolio should seek the aid of a highly regarded wealth manager instead of trying to guess which company is a good long term investment. The market, as tracked by the Down Jones Industrial Average, is trading marginally above where it was 10 years ago. This suggests that buying and holding an average stock in this index would be a poor investment over the last decade.
As well, Morningstar reveals a total return rate of only 3.79% over the past 10 years on the 6,003 funds tracked as of November 2nd 2009. Clearly, getting a decent return is more difficult than blindly throwing money at the market.
The investor who does not mind actively trading both bull and bear markets may find more profits in high growth stocks than blue chips. Why?
The High Growth Stock is a Two Edged Sword
Well respected investor William J. O’Neil, author of How To Make Money Selling Stocks Short, will tell anyone that high-growth stocks will be leaders in bull markets, but often fall the hardest during bear markets. If a trader can find a consistent method to trade high-growth stocks long in up markets and short in a down markets, his profits will dwarf the buy and hold investor. But that is a big ‘if.’
How does one trade high-growth stocks without the market crushing him like an elephant sitting on a grape? One way is to use a system that times buy and sell transactions with market sentiment. An example of this is swing-trading. The other is much simpler and involves the use of protective put options on high growth securities. Both methods will be discussed in future articles.
Whether a trader uses the slower paced blue chip stocks accompanied by high yield dividends, or the more volatile high growth stocks to invest in, both can produce good results with due diligence.
Kurtis Hemmerling - Kurtis Hemmerling began his stock trading career at the tender age of 10. His first official trading recommendation was to his father on ...
