Investors, particularly when they are approaching retirement age, typically prefer safety and familiarity over risk.
True, when you're past the accumulation phase of your life excessive risk-taking would be unwise. After all, you should be thinking about how you will fund your lifestyle when you stop working, and ensure you have enough to support yourself comfortably.
However, the problem that many investors make is by going too safe. Allow me to explain…
Australia's economy is heavily concentrated to just a handful of sectors and companies. In fact, the nation's top 20 shares make up roughly 60% of the entire S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), with Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) accounting for a combined 16.1% on their own.
Now, many of these shares have generated huge returns for investors over the years and, in some cases, decades. Commonwealth Bank is a great example in this regard, as is Woolworths Limited (ASX: WOW), despite its shocking performance over the last 12 months.
Through both dividends (especially the fully franked kind) and capital gains, these blue-chip shares have become trusted components of many portfolios. Indeed, there is no doubt some portfolios are exclusively made up of these positions, whereby an investor believes history will repeat itself.
However, if the past 15 months are anything to go by, those investors may want to rethink their strategy…
The ASX 200 has fallen considerably from a high of nearly 6,000 points it achieved in March 2015. Here are just a few examples of how some blue-chips have performed since then:
- Woolworths down 29.3%
- Commonwealth Bank down 23.5%
- BHP Billiton Limited (ASX: BHP) down 41%
- Telstra Corporation Ltd (ASX: TLS) down 16.3%
That isn't to say that none of those businesses are a decent buy today, nor does it suggest that none of them deserve a position within your portfolio. However, it does highlight that these businesses are not without their own risks, while even today the risks could still outweigh the potential rewards for anyone buying their shares.
Looking at tomorrow's blue chips
While the ASX 200 has been dragged lower by some of the more traditional blue chips in the last 15 months, there have been a number of success stories outside of the country's top 20 stocks. And the good news is they could still have growth left in them over the coming years.
According to The Australian Financial Review, some of the companies favoured as being tomorrow's blue chips (by Chris Batchelor from Skaffold and Jason Yin from Lincoln Indicators) include Nick Scali Limited (ASX: NCK), Webjet Limited (ASX: WEB), Blackmores Limited (ASX: BKL), Domino's Pizza Enterprises Ltd. (ASX: DMP) and TPG Telecom Ltd (ASX: TPM).
All represent fine businesses, although I would be hesitant to invest in either Nick Scali or Domino's Pizza. Nick Scali has had a great run, but is susceptible to a pull back in house prices (the company sells furniture), while Domino's Pizza appears quite expensive. It's a great business, for sure, and could have further to run, but it is risky.
Another few companies that I believe are worth keeping a close eye on are Burson Group Ltd (ASX: BAP) and Bellamy's Australia Ltd (ASX: BAL). The pair have generated great returns already for investors but, unlike many of the traditional blue chips, could still have plenty more growth left in them.
