The Exclusive Club of Large Caps

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!

Glenn ("Chip") Dahlke, a senior contributor to the Living Trust Network, is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him at [email protected]. You may also contact him by going directly to the Living Trust Network web site located at http://www.livingtrustnetwork.com

Copyright 2005. LivingTrustNetwork, LLC. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without the written consent of the Living Trust Network, LLC.

In The News:


Traders, Defend Against the Dreaded Death Spiral.

It has often been said that there is only two... Read More

Investment Discipline

One of the great "secrets" of successful people is discipline... Read More

Valuation

Every day I hear from the "experts" on CNBC-TV and... Read More

Small-Cap Stocks: The Beginning of the Journey

When an individual investor wants to roll up his sleeves... Read More

The Skinny on Mutual Fund Investing

Mutual fund investing is a lot like Thai cooking. Everyone... Read More

The Cub; II

We keep hearing about this bear market and that the... Read More

How To Beat The Mutual Fund Companies At Their Own Game

You'd have had to be living on a desert island... Read More

Wall Street Paradigm

In 1960 an engineer working for a watch company in... Read More

Hedge Fund Advertising

Have you seen all those big full page ads for... Read More

Stock Trading Secrets?

How often have you come across an advertisement or e-mail... Read More

Ignore Stock Market Talking Heads

You should ignore analysts on TV, the radio, the newspaper... Read More

No Load Mutual Funds: Investment Hype vs. Investment Help

With the internet such a huge part of our daily... Read More

Investment Research - The Dalbar Study

Very few people, even professionals, have heard of the Dalbar... Read More

Complacency

During the month of January the Dow Jones Industrial Average,... Read More

Option Spread Trading

Spread trading is a technique that can be used to... Read More

War Market

There is no question that the stock market is being... Read More

Trading For A Living

How many times have you said to yourself, "I'd like... Read More

Successful Trading ? Establish Your Risk Level

Before you embark upon a journey of trading stocks or... Read More

Momentum

One of the basic laws of physics states that a... Read More

Hedge Funds

You read and hear a lot about hedge funds. Unfortunately,... Read More

The Value of Stocks of a Company

The debate rages all over Eastern and Central Europe, in... Read More

E-mini Day Trading - Day Trading for Beginners - Stock Market Timing Software

I mean it when I say that. While plastic silverware... Read More

Discover the Biggest Trading & Investing Online Mistake

Any online investor / trader seeks an excellent off or... Read More

365/7/24

What does it take to be a stock trader? It... Read More

How to Pick Winning Stocks

There is nothing more exciting than finding an undervalued stock... Read More