The Best Types of Investments in Uncertain Times | Personal finance

(Stefon Walters)

There are no guarantees in the stock market, but there are investments that have stood the test of time and proven to hold up better than others in times of uncertainty. If you’re looking for some sense of “stability” during these times, look no further than these stocks every portfolio should include.

Blue chip stocks

Although there is no single definition of what a blue chip security is, it is generally accepted that it refers to well-established companies and cash cows that are leaders in their industry and household names.

Companies such as Starbucks, Microsoftand McDonald’s would be considered blue chip stocks, for example. Starbucks and coffee are becoming synonymous, Microsoft could be considered the original tech powerhouse, and McDonald’s is as recognizable a brand as any company in history.

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To even receive the title of a blue chip stock, a company’s track record must be top notch. That doesn’t mean everything is always up to the company, but it does mean that they have the financial resources and the brand to weather almost any bad economic storm. This is important in times of uncertainty because the long-term stability (relative to smaller, lesser-known companies) that can come with blue chip stocks is hard to replicate.

You don’t want your entire portfolio to be blue chip stocks, but they should definitely be a staple. For companies to become blue stocks, they had to go through strong growth, and as an investor there is a lot of money to be made in that growth. If your portfolio is all blue chip stocks, you don’t own any younger companies with hypergrowth potential. Companies like Apple (NASDAQ:AAPL) and You’re here (NASDAQ: TSLA) had to start somewhere – and they’ve enriched a lot of people along the way so far.

Large Cap Companies

There is a risk/reward tradeoff with investing. Stocks are riskier than bonds, but have virtually unlimited upside potential. Within the stocks themselves, there is also a risk/reward trade-off based on company size. Smaller companies have a lot more room for growth in their business, which usually means there is more room for growth in their stock price. However, with this growth potential comes greater risk, as smaller companies have fewer resources.

Large-cap companies, defined as companies with a market capitalization of at least $10 billion, may not have as much room for hypergrowth in their business, but due to their size they have often far more resources to keep the business afloat despite a larger economy. conditions.

This is important for long-term investors because tough times in the stock market are inevitable and you want to feel comfortable dealing with them after the fact because you believe in a stock’s long-term potential.

The stability of large cap stocks is why people tend to look to them during bear markets when prices are falling.

You can’t go wrong with funds

The good thing about blue-chip stocks and other large-cap companies is that you can invest in them using exchange-traded funds (ETFs), which can help spread some risk.

There are many ETFs that focus specifically on large-cap companies, one of the most popular being the Vanguard S&P 500 ETF (NYSEMKT: VOO). The S&P 500 is an index that tracks 500 of the largest US public companies. S&P 500 index funds are very inexpensive, highly diversified, and have provided respectable returns over the long term (around 10% per year). You can also find your fair share of ETFs that contain only blue-chip stocks, but the funds are usually set up by professional investors, so they tend to be more expensive.

You also want to make sure you don’t completely abandon smaller players during times of uncertainty. The Russell 2000 is considered the go-to benchmark for small-cap stocks, and although it typically underperforms the S&P 500 during bear markets, it tends to outperform it in the early stages of a bull market, making down periods are a good time to pick up these stocks for a “discount”.

You may not want to take the risk associated with investing in individual small- or mid-cap companies, but investing in a well-diversified ETF containing these companies is always a good decision. You always want to give yourself a chance to take advantage of the growth potential of small businesses.

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Stefon Walters holds positions at McDonald’s and Microsoft. The Motley Fool holds positions and recommends Microsoft, Starbucks and Tesla. The Motley Fool recommends the following options: Short Calls October 2022 at $85 on Starbucks. The Motley Fool has a disclosure policy.

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