Is It Time To Start Buying Blue Chip Stocks?

Barring some phenomenal rally in the last weeks of the year, 2008 will go down in history as one of the worst year’s ever in the stock market. To date, the Dow Jones Industrial average has fallen 37%. That would mark the 3^rd worst performance in the Dow’s history. The worst year being the 53% drop in 1931.

Conventional wisdom has always said that if you invest in solid, blue-chip companies for the long-term, you will be rewarded with higher returns. However, we at eChristianInvesting have recently performed some detailed analysis on the Dow’s performance over the last 10 years and have found that conventional wisdom doesn’t always hold true. Over the last 10 years, investing in the Dow as a whole would have yielded an average return of -3% per year and your investment would currently be worth 1/3 less than what you had originally invested.

So maybe the shotgun approach to investing isn’t the way to go?

So now let’s take a look at the individual Dow component performances over the last ten years. Investing in Exxon Mobil, United Technologies, 3M, Chevron or Caterpillar ten years ago would have more than doubled your investment. However, only half the Dow components (15) have increased in value over the last ten years, while 14 would have lost you money. So is picking blue-chip stocks just a 50-50 guessing game with equal chances of winning and losing?

Maybe a better strategy would be to invest in the top performing stocks each year? We took a look at the top 5 performing stocks in the Dow each of the last ten years. If you would have bought the top performing stock each year, you would have watched that stock lose money in 6 out of the 9 subsequent years. On average, the top performing Dow stock has lost 15.7% the following year. Surprisingly, the 2^nd best performing stock has behaved much differently, averaging a 9.6% return the following year.

Now let’s take a look at the top 5 worst performing stocks in the Dow each of the last ten years. If on December 31^st of each year, you would have bought shares in the worst performing Dow stock of that year, you would have earned a positive return in 7 out of the 9 subsequent years. The worst Dow performer as averaged a 19.4% gain the subsequent year. Excluding this year’s horrible performance, that average jumps to 31%. Few investors would complain about those types of returns.

If you would have invested in the 2^nd worst performing stock each year, the return isn’t quite as impressive, but is still very good. Those companies have posted positive gains in 6 out of the subsequent 9 years and have averaged a 13.8% annual return. Again if you exclude this year’s abnormally bad performance, that average return goes to 17%.

Without a doubt, 2008 has been an incredibly bad year for almost all stocks. However, stock market crashes always present unique opportunities for investors willing to invest when things don’t look great. Buying stocks that have been this year’s worst performers may not be conventional wisdom, but don’t be surprised to see General Motors and Alcoa be next year’s biggest Dow winners.

At the time this article was published, the author did not have a financial position in any of the stocks mentioned in this article.

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