Warning: your share portfolio of blue-chip stocks is riskier than you think

It hasn’t been a good year for blue-chip stock investors .

We’re not just talking about mining stocks either.

And there’s no guarantee it will get any better.

If you own any blue-chip stocks, you need to know what’s going on…

Since the high in March, Aussie banking stocks as measured by the S&P/ASX 200 Financial Index are down 15.4%.

Retail giant, Woolworths Ltd [ASX:WOW] is down 29.8%.

And telco giant, Telstra Corp Ltd [ASX:TLS] is down 18.3%.

Most Aussie investors own at least one of these stocks. But it’s not just these stocks that have fallen.

The overall S&P/ASX 200 index is still down 12.2% from the peak too.

Tiny stocks beat big stocks

It has been a stunning year for Aussie stocks.

In many ways, the Aussie market has suffered what we can only describe as a ‘silent crash’.

Take another big Aussie blue-chip stock, BHP Billiton Ltd [ASX:BHP]. It’s down 27.8% from this year’s high. It’s down 49.6% from its 2011 high.

That’s a stunning drop.

It makes a mockery of the idea that blue-chip stocks are safe.

The reality is that no stock is truly safe, regardless of the company’s size.

The funny thing is, since blue-chip stocks peaked in March, they’ve fallen 12.2%. However, the market’s riskiest stocks, including those in the S&P/ASX Emerging Companies Index, have gained 7.5%.

You can see this in the chart below. Blue-chip stocks are the white line, small-cap stocks are the green line:

Source: Bloomberg

Click to enlarge

So, why is this happening?

We can only guess. Our bet is that investors have caught on to the message we’ve spread since launching our high-risk Microcap Trader service in June this year.

We pointed out that many investors don’t realise the huge risks they’re taking by investing in blue-chip stocks.

That’s because investors think blue-chip stocks are safe. Because they think they’re safe, they tend to invest more money in those stocks.

That could mean investing 80–90% of their investable wealth in blue-chip stocks. That’s a lot. And it’s potentially a big loss from the peak. If you own any of the big blue-chip stocks we’ve mentioned above, your portfolio has taken a big hit since the March peak.

Blue-chip stocks aren’t as safe as you think

By contrast, investors who have followed our advice to not put more than 30–40% of their investable wealth in stocks should have fared better.

We’re not saying that you shouldn’t own blue-chip stocks.

We’re simply saying that you must understand the risks.

And although it may seem counter-intuitive, it’s possible to actually reduce your risk and potentially increase your returns by holding high-risk small-cap and microcap stocks.

How is that possible?

That’s easy. Investors who understand risks, know that they can diversify their portfolio by investing a small part of their money in the market’s tiniest stocks.

For instance, you could follow our advice by putting 30% of your portfolio in blue-chip stocks. If that amounts to $30,000, you would be down $3,660. That’s assuming your blue-chip stocks replicated the performance of the Aussie blue-chip index.

Now let’s say you took 5% of your portfolio and invested it in the market’s tiniest stocks, such as those we recommend in Microcap Trader.

If you had followed all our ASX stock picks, you could be up 41.5%. If you had invested just $5,000 across those picks, you would be up $2,075.

That would help make up for some of the losses on your blue-chip portfolio. If you had invested 10% of your portfolio in these stocks, it would have made up for all the losses on your blue-chip portfolio, and it would have left you with an overall profit.

Of course, we’re not saying that the market’s tiniest stocks are safe stocks. We’re simply saying that it’s a mistake to think that blue-chip stocks are always safe.

The performance of the Aussie share market’s big stocks this year shows you how dangerous it can be to put too much faith in them.

Blue-chip stocks have taken a beating since March, and unfortunately for investors, there’s no guarantee that the beating will end anytime soon.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read. Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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