A healthy portfolio usually has a variety of assets that will keep it diversified and thereby shielded from unexpected fluctuations in any sector of the market. For a physician investor, to achieve this type of diversification, they should become familiar with the options available to them. Unfortunately, descriptors and abbreviations tossed around by experts can confuse or mislead those living outside the financial realm.
For example, a common term known to both experts and novices alike is blue-chip stock. For many, this conjures images of a high stake’s poker game—and this wouldn’t be far off. As shared by BlueChipList.com, the term blue-chip stock was coined by Oliver Gingold, a journalist at the Wall Street Journal, who spouted the phrase in 1923 while observing a stock ticker that showed some trades at $200 or more per share (a staggering sum back then). He likened them to the blue chips used at a poker game, which always carried the highest value. The moniker has been in use ever since.
So, what does that delightful historical anecdote mean for investors? It means that the blue-chip stocks are at the top of the food chain. NerdWallet informs us that although there is no clear-cut or quantifiable definition of blue-chip stocks, they are understood to be large companies that have often stood the test of time and are usually reliable investment prospects. They are household names like Coca-Cola and have long-standing seats on the Dow Jones Industrial Average or the S&P 500.
Blue-chip stocks are very large companies and typically have a market valuation of $10 billion dollars or more and tend to be reliable dividend providers. Again, since there is no strict standard regarding this descriptor, you find experts referring to stocks as blue chips even when they don’t adhere to one or more of these items.
You will also find the term blue chip used synonymously with large-cap because large-cap stocks are strictly defined as having a market capitalization of $10 billion dollars or more, which makes the two terms intersect. Usually, blue-chip is used more as a descriptor rather than a definitive category.
So, should you invest in stocks described as blue-chip? Most advisors would say yes. Should you invest only in blue-chip stocks? Most advisors would say no. Diversification is still key and although blue-chip stocks offer a level of predictability—they do sometimes falter. Speak with your advisor about how to balance your blue while staying out of the red.