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.
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.
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.
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.
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.