When it comes to investing, the seemingly endless choices can feel overwhelming. Naturally, you might wonder how some investments stack up against others and which are best for your individual investment goals. For example, should you go with blue-chip stocks or index funds?
Whether you should buy blue-chip stocks or index funds depends on your investing strategy. Blue-chip stocks are both lucrative and reliable, but index funds provide more market coverage and diversity. Optimally, you should aim to bolster your portfolio by owning both.
Navigating the world of investing is tricky. That is why, in this article, I have gathered all the essential facts regarding blue chip stocks and index funds to make the choice between them easier for you. On the way, you’ll learn the pros and cons of both blue-chip stocks and index funds, as well as how to determine which is best for you.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
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Choosing Between Blue Chip Stocks and Index Funds
So, blue-chip stocks or index funds – which should you buy?
There are two main points you should consider:
- What is your investment strategy?
- Which specific stocks or funds do you want to acquire?
You may want to go with blue-chip stocks if you prefer a more active investment strategy. In comparison, index funds offer diversification that can fuel long-term profit through passive investing.
However, the opposite can also be true.
Some blue-chip stocks provide solid coverage of their entire industry like an index fund, and some index funds experience high volatility like stocks. In the end, you’ll get the best results if you research each of your investments thoroughly.
Ultimately you can’t go wrong either way. Both securities are staples in the portfolios of expert investors.
To help you decide, we compiled the pros and cons of blue-chip stocks and index funds below. And by the end, you may decide you want both in your portfolio.
Blue Chip Stocks
Why Would You Want To Buy Blue Chip Stocks?
Blue-chip stocks derive their name from blue poker chips. In poker, these chips traditionally hold the highest value at the table.
Likewise, blue-chip companies are typically the most valuable and prestigious ones.
There are numerous reasons why you’d want to buy blue chip stocks:
- They have long track records of success. Blue-chip companies like Disney and Coca-Cola have faced the test of time and continue growing more robust than ever.
- These stocks generally have more potential for short-term profit than index funds. If you prefer an aggressive and active trading style, blue-chip stocks may be more suited for you.
- Trading blue-chip stocks give you more flexibility than index funds. You can’t actively choose the underlying investments of your index funds. But you can decide which individual blue-chip company shares you buy.
These stocks definitely earned their moniker. They’re a sort of gold standard within their respective industries. And most of the time, they make solid and stable investments.
Still, no investment is perfect. Next, let’s look at some of the cons of blue-chip stocks.
Downsides to Blue Chip Stocks
Here are some of the downsides of these securities:
- They’re vulnerable to bad press and poor earnings reports. Taking a hit to their pristine reputation can be disastrous. An example of such an occurrence would be the Boeing stock plummeting following multiple 737 MAX crashes.
- Owning only blue-chip stocks limits your portfolio diversity. The basket of stocks that index funds provide, gives you a broader market coverage than individual blue-chip stocks.
Blue-chip stocks rightfully earned their prestige. They possess outstanding track records and are among the most reliable companies to invest in.
But no company is too big to fail. So if you decide to buy blue-chip stocks, just make sure you don’t put all your eggs in one basket.
Index Funds
Why Would You Want To Buy Index Funds?
Index funds have received a massive boost in popularity lately, thanks to the millennial investors. You can also check TD Ameritrade’s video explaining Index Funds:
Let’s examine what makes them a solid investment for you.
- They bring diversification to your portfolio. Index funds provide lots of diversification by tracking large market indices. This can be a boon for portfolios suffering from market exposure.
- Index funds provide stable long-term growth. If you’re investing primarily for retirement, studies have shown that index funds are stellar for precisely that purpose.
- They’re great for hands-off investing styles. Since index funds track numerous underlying stocks, they’re great for people who don’t have time to research and trade shares individually.
Index funds are the anchor of many portfolios. If you desire a passive investment that you can leave to accrue value and dividends slowly, then these are your best bet.
Not to mention many blue-chip stocks are part of various index funds. So, you can essentially kill two birds with one stone by buying them.
Downsides To Index Funds
Here are the downsides to index funds:
- Some index funds leave you vulnerable to market exposure. Many index funds track niche, specific industries. As a result, they might become worthless if their specific industry slowly turns obsolete or suddenly collapses.
- Index funds generally won’t produce significant returns quickly. Index funds are solid long-term investments due to their slow maturation and dividends. So, they won’t help much if your goal is short-term profit.
- They don’t really offer you much control. You can’t decide what your index funds invest in or how. As a result, investing in stocks gives you much more control over your portfolio.
Blue Chip Funds: Blue Chip Stocks and Index Funds Alternative
If you’re comparing securities, you may have come across the term blue chip fund.
As the name suggests, this refers to a fund that tracks blue chip indices or invests solely in blue chip companies.
Despite the name, these aren’t usually index funds. Typically, they’re mutual funds directly run by an investment manager. They can make a great alternative option if you struggle to choose between blue chip stocks or index funds.
However, keep in mind that mutual funds work differently from index funds. Many require a hefty minimum investment and payment of periodic service fees.
Why You Should Have Both – Blue Chip Stocks and Index Funds – in Your Portfolio?
If possible, what you should really do is invest in both index funds AND blue chip stocks.
Now that you know the weakness and strengths of both, you can see how they complement and balance each other.
Your index funds can mature into fruitful retirement funds and provide dividends. Meanwhile, you can trade blue chip stocks more actively to make short-term profits simultaneously.
Depending on your strategy, it may even be the reverse.
By having both in your portfolio, you can maximize your chances of success on the market.
However, you may still wonder why you shouldn’t just buy a lot of whichever stock or fund you think is best. Why have a variety of both in your portfolio?
The answer is modern portfolio theory and the importance of diversification that it teaches.
Modern Portfolio Theory
Nobel Prize-winning economist Harry Markowitz introduced modern portfolio theory back in 1952. But it’s still the foundation of many investors’ strategies.
Even robo-advisors are programmed to follow modified versions of the strategy (if you had any doubts about their performance, studies have shown that they are remarkably effective).
At its core, the theory suggests both diversification and balancing different types of investments.
By having variety in your portfolio (but not too much), you can maximize your potential returns while limiting your risks.
Owning both index funds and blue chip stocks means the benefits of both help cancel out each other’s weaknesses.
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Conclusion
When choosing index funds or blue chip stocks, you really can’t go wrong. Usually, both are solid investments that bring excellent returns through trading and dividends.
Each has its unique strengths and weaknesses, which is all the more reason you should incorporate both into your portfolio.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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