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The Exclusive Club Of Large Caps
By: Glenn
Picture one of those clubs where only the real heavyweights need apply. In the
library the old aristocrats, General Motors and JP Morgan, are dozing in their
leather chairs. On the terrace, a late luncheon is underway for those who have
only improved their standing through marriage. ExxonMobil and Citigroup are part
of the party. At the bar, a number of the"nouveau riche" have gathered -
Microsoft seems to be buying for Intel and Hewlett Packard. Welcome to the world
of the Large Cap Stock Club, the biggest of the worlds publicly traded
companies.
For those interested in applying, membership includes a minimum market
capitalization of at least $1 billion and can go upwards to $10 billion
depending on whom you talk to. Included in the resumes are often affiliations
with other well known groups. 30 are currently with the Dow Jones Industrial
Index and many more with the Standard and Poor's 500. Both these groups are
widely followed indicators of the health of the stock market.
The Dow Jones Industrial Average (DJIA) traces its lineage back to 1928 when
companies like Victor Talking Machine (later merged into RCA Corp.), Nash Motors
(later merged into American Motors) and F.W. Woolworth Company kept company with
General Electric and General Motors, the only two remaining original members.
Today, household names like McDonalds, Home Depot, Disney and Wal-Mart have
replaced some of their earlier brethren. Calculating the average is done by
adding the prices of the 30 stocks and dividing by an adjusted denominator.
Because the Standard and Poor's 500 Index (S&P 500) has 500 companies in the
index, many believe this to be a more accurate indicator than the DJIA. Also
unlike the Dow Jones Industrial Index, the S&P 500 is a weighted index - meaning
each stock's weight is determined by its market value.
Unofficially, some Large Cap companies are known as "blue chips". This term
originally came from poker chips where the blue chips were the most expensive.
Today, this generally denotes high quality, usually being reserved for large
companies with stable earnings and a history of dividend growth.
Investors in mutual funds are apparently big fans of Large Cap stocks. Of the 10
largest mutual funds, seven are invested primarily in US Stock and all of these
(Growth Fund of America, Investment Company of America, American Funds,
Washington Mutual, Dodge & Cox Stock, Fidelity Contrafund, Fidelity Magellan,
and Vanguard Index 500) are Large Cap funds.
One might think that, with all these pedigrees, the world of large caps might be
scandal free, but with the recent lessons learned from Enron and WorldCom, we
know that even the mightiest can fall from their lofty perches. Once again, we
are reminded that when it comes to investing, there simply are no guarantees.
Looking at returns (using the annual returns of the S&P 500 from 1926 - 2004,
including reinvestment of dividends ) we find that the best year for Large Caps
was 1933 with a return of +53.99%. On the other hand, two years prior to that,
in 1931, the return was a dismal -43.34%. Of the 78 years between 1926 - 2004,
the S&P 500 posted positive returns for 56 of those years. To put it another
way, therehave been more than twice as many up years as there were down years.
Naturally, this is all past track record. The future holds no guarantees that
this will continue.
Turning again to Large Cap mutual funds, it is important to note that most are
"managed" funds, rather than "unmanaged" funds like the S&P 500 Index. This
simply means that most mutual funds have managers who pick certain stocks out of
the large cap universe rather than follow an index of the entire universe. This
not only creates return differences between the funds and the indexes, but also
creates differences between the funds as well.
It may also be a good idea to check the dividend history of funds. While some
funds specifically buy stocks with higher dividends, other funds could care less
what dividends are paid. Normally, stock based mutual funds will pay dividends
once a year (usually in December), but sometimes pay more frequently. Whatever
the case, the amount of dividends can be important depending on the need for
income.
Obviously, large companies shouldn't be the only asset class considered for a
well rounded portfolio. Mid-size companies and small-size companies are
important to achieve proper asset allocation. However, for investing in well
known companies that are truly the "movers and shakers," nothing beats the Large
Cap Stocks.
Home James!
Copyright 2005. LivingTrustNetwork, LLC. All rights reserved.
About the Author:
Glenn (“Chip”) Dahlke, a senior contributor to the Living Trust Network (http://www.livingtrustnetwork.com),
has 28 years in the investment business. He is a Registered Representative of
Linsco/Private Ledger and a principal with Dahlke Financial Group. If you have
any questions or comments, Chip would love to hear from you. You may contact him
by email atdahlkefinancial@sbcglobal.net
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