For decades, blue-chip shares have been the go-to investment vehicle for Aussie investors – think Telstra, BHP and Woolworths, which are staples in many investment portfolios.
The ‘blue-chip’ term originated in poker at a time when blue chips were the most valuable in the game. Blue-chip companies are typically well-known, well-capitalised businesses that are often seen as being a relatively ‘safe’ investment.
They may also pay a high, attractive franked dividend too, making them a common choice whether you’re investing for a child or allocating your investments inside a self-managed super fund.
The problem is, many so-called blue-chip companies are being disrupted in a business landscape that’s changing faster than ever. Today’s blue-chips won’t necessarily deserve the label in five or 10 years (or even less). When disruption hits – whether it’s online retail to Myer, wealth management changes to AMP, or new telecommunications technology to Telstra – the effect on share prices can be swift and brutal.
Recent fears over proposed franking credit reform shows us that, when it comes to investing, there’s no such thing as a sure thing. It’s led many investors to think about whether they’ve become too reliant on Australian blue-chips.
If you have a look at some of the biggest companies in the US today, you’ll find Apple, Microsoft, Amazon, Google (Alphabet) and Facebook. Go back 10 years and the five biggest stocks were Exxon Mobil, General Electric, Citigroup, Microsoft and AT&T.
Only one company remains in the top five – the world has changed a lot in 10 years. And that change will most likely continue.
To be fair, blue-chip shares can be attractive for the dividends they usually provide. At a time of such low interest rates it’s hard to find an attractive, safe return. But a company dividend is not a bond. It comes with much more risk!
There are two risks that investors need to be aware of when investing in blue-chip stocks:
When blue-chip businesses face disruption and their business models are challenged, often one of the first changes is cuts to dividends. Many Telstra shareholders are very aware of this risk – a risk that wasn’t as evident five years ago.
When your investments are strongly centred around one kind of vehicle, you’re concentrating your investment risk, which can create serious issues if conditions change. Many Aussie investors are already prone to home country bias (favouring local investment opportunities over others) even though Australia makes up only about 3 percent of the world’s investable opportunities. And the allure of franking credits only seems to worsen this bias.
Rather than being too reliant on an investment strategy that relies too heavily on Aussie shares or on specific tax benefits such as franking credits, you might want to introduce some global diversification to reduce your dependence and exposure to the Australian market.
In the past it’s been hard to invest overseas due to high trading costs, currency conversion complexities and tax requirements all contributing to the time and expense required to make off-shore investments. This is no doubt one of the reasons so many investors have concentrated on Australian shares.
However, times have changed and, importantly, the continued growth of the exchange-traded fund (ETF) market in Australia now provides investors with fantastic low-cost solutions to easily invest in different kinds of assets overseas, including property, shares, infrastructure and emerging markets.
ETF issuers such as Vanguard, iShares (owned by BlackRock) and State Street have grown exponentially as investors around the world learn about the importance of diversifying and keeping costs low. iShares alone manages more than $1 trillion of ETF investments globally while, here in Australia, more than $47 billion is now invested via the ASX in exchange-traded products, which are bought and sold on the ASX in much the same way as shares.
(ETFs aren’t new either, though their popularity is soaring. The first ETF, tracking the S&P 500 in the United States, traded in 1993 and is still trading today!)
Investors can now also use online investment managers (also known as ‘robo-advisers’) to help them build and manage a globally diversified investment portfolio that includes a variety of asset classes to match their preference for risk. These low-cost services can take the guesswork out of trying to decide how to invest by providing you with an investment strategy and getting you invested then looking after your ETF investments, which are all held in your name.
The future is always unknown and, while we don’t know which companies will deserve the title of blue chip in a decade, we do know that diversification protects against an unknown future.