Reduce Investment Risk by Focusing on Financially Strong Companies with Proven Performance and Consistent Returns.
Fear and greed are always at work with blue chip stocks, creating tremendous highs and lows. These emotions drive investors’ decisions about what stocks to buy and when to sell them. In fact, 70% of investors focus on current events and world news when making decisions. Even if they own blue chip stocks, this exposes them to the forces of fear and greed.
These choices can lead to fatal mistakes that lock in significant losses when the stock market is down. Only for the markets to finish selling off and move higher after this happens. This can have negative impacts on their ability to reach their goals.
What these investors do not realize is that long-term investing requires embracing several concepts. Some of the most important aspects of long-term investing are discipline and focusing on quality. Whether you are building a retirement portfolio or your net worth, these concepts are critical to your success.
In this article, we examine how to pick safe stocks for long-term investing. We will look at which stocks to buy, how to pick, and monitor them. Together, these elements will help you to find the right stocks for your portfolio.
Focus on Blue Chips and Aristocrats
Blue chip stocks and aristocrats are some of the best long-term stocks to buy. These companies are leaders in their industries, have strong brand names, and consistent cash flow. A few good examples include Chevron (NYSE: CVX), Disney (NYSE: DIS), and Occidental Petroleum (NYSE: OXY).
These stocks have several different traits that give them advantages over others.
- High liquidity levels to buy and sell.
- Stable earnings and dividends.
- Lower volatility when the markets are selling off.
How to Pick Safe Stocks?
There are several criteria you should follow to pick safe blue chip stocks and aristocrats. Here are the different ones you should consider to identify the best candidates.
Market Capitalization: First, you should focus on those stocks with a market capitalization of at least $10 billion. These companies should have a minimum dividend yield of at least 2% and favorable credit ratings.
Valuation Metrics: Next, you want to look at the forward price-to-earnings (P/E) ratio. This will tell you if the stock is over or undervalued compared to its forward earnings. We recommend considering those stocks with a forward P/E ratio below 12. This says the stock is oversold and has an attractive valuation. You want to be cautious of stocks with a P/E ratio over 30 without the earnings growth to support it.
Liquidity Levels: Companies with daily trading volumes over 500,000 shares are ideal candidates. They make it easier to buy or sell their shares and get a good execution price.
Dividends: The dividend history will tell if the company is stable by continuing to pay or raise them. Dividends must come from the actual cash the company has on its balance sheet. If the company has a history of paying and raising dividends, it could be a good candidate. We recommend buying those stocks with consistent dividend payouts going back 20 years. This will tell you how it performed at different stages of the economic cycle.
Wait for a Selloff: Always purchase these stocks after a selloff. This is when investors are fearful, and the stock is oversold. This opens up a buying opportunity to purchase the stock at a fraction of its value.
Monitoring Your Blue Chip Stocks
Even though these stocks are considered to be safer, you want to monitor them on a set schedule.
Semi-Annual or Annual Evaluations: We recommend evaluating the performance semi-annually or annually. This will help you to see through the fear and greed and better understand what is happening.
Dividends: Next, evaluate the dividends and see if they are remaining consistent or rising. The best companies will maintain this consistency to improve your returns.
Earnings: Never get emotional over these companies when they have a bad quarter. What matters is their history and the fact that they have products or services in demand. These factors will help them to weather any challenges and move higher when Wall Street is overly critical.
Ignore the Headlines: It is important to remember that the news media is often driven by fear and greed. This can influence investors’ decisions. Staying focused on your strategy helps you to ignore the noise and make better decisions.
Overly monitoring the headlines exposes you to fear and greed. The best approach is to use them as a contrarian indicator. Normally, when you hear the news media say that something is going to happen, the opposite is true.
For example, during the 2008 recession, the news media wondered if the stock market would ever go back up. They brought in panels of experts who tell you how bad things are, and they will become worse.
Yet, in reality, most investors were fearful, and those who held their stocks or bought more shares were rewarded. The best advice is never to take the news media too seriously. Bad news sells, and this is how they make their money.
The Bottom Line
Finding the right blue chip stocks for your portfolio requires never becoming emotional. You must evaluate what is happening objectively and be disciplined in your approach. These stocks are safer, but you must remember to buy them at the right time. This will help you to find value and invest in good companies when everyone else is driven by fear and greed.