Investing in Large-Cap

Investing in Large-Cap

There is no doubt that investing in large-cap (the short version of the term “large market capitalization”) U.S. stocks have been a winning long-term investing strategy for decades.

The companies that fall under this umbrella are some of the most recognizable brands and companies that have grown tremendously over the years. large-cap stocks like Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA) are just some of the options investors have when looking to build their portfolio.

According to Goldman Sachs, 10-year stock market returns have averaged 9.2% over the past 140 years. More recently – between 2010 and 2020 – Goldman notes that the S&P 500, which is regarded as one of the best gauges of large-cap U.S. equities, has done even better than the historic 10-year average, with an annual average return of 13.6% in that decade.

This record is likely why even legendary investor Warren Buffett advises small investors to buy S&P 500 index funds. This is because these are great stocks for the passive investor or for those who are just starting out on their investment journey. Why? Because these are some of the biggest, healthiest, and wealthiest companies in the world. Meaning, investors who don’t know much about investing can rest assured that their money will be safe over the long term.

Since one of the chief concerns of those just starting out in investing is not knowing enough or the fear of losing money, large-cap stocks can provide some stability to your portfolio while you learn more about investing and what kind of investor you are.

What Are Large-Cap Investments?

A large-cap company is defined as one with a total market capitalization of over $10 billion. This metric is calculated by multiplying the number of a company’s outstanding shares by its stock price.

As an example, Apple has a market capitalization of $2.6 trillion. If the stock is currently worth around $164 and has outstanding shares totaling 15.8 billion, you get a market cap of $2.6 trillion.

These stocks are larger, more established companies and are therefore usually low beta investments than small-cap or mid-cap stocks. However, apart from some of the technology giants, many of these companies are slower growing than their smaller counterparts.

Large-cap stocks represent about 87% of the total U.S. stock market, according to metrics provided by StockMarketMBA.com. This means there are a wide variety of U.S. stocks to choose from that can help you add large-cap stock exposure without having to do an overly burdensome amount of portfolio analysis.

As a matter of fact, as you’ve seen above, there is a good chance the companies that you may already consume products of are large-cap stocks that you can exchange buying product from for buying stock of.

Since large-cap stocks represent the majority of the U.S. stock market, they are often looked to as core portfolio investments. Many investors build their portfolios around this core. They may have much of their portfolio in these large-cap names to take advantage of the stability and staying power of the brand, as well as catch any outsized growth some of the larger companies may have, like that of big tech companies.

Why Invest In Large-Caps?

There are many characteristics of large-cap stocks that attract investors, two we have already referred to is the stability, as well as any future growth prospects. However, there are plenty more benefits to investing in large-cap stock, which include the following:

• Transparency: large-cap companies are typically transparent, making it easy for investors to find and analyze public information about them.
• Liquidity: Another plus is that large-cap equities offer an ample amount of liquidity. It’s therefore easy to buy and sell these stocks at current prices, no matter the market conditions. The same cannot be said, at times, about smaller stocks during periods of high market volatility.
• Stability: Most large-cap companies are financially sound and have a track record of consistent growth and profitability. That’s why they are sometimes referred to as “blue-chip” companies.
• Dividends: Established large-cap companies are most often the choice for investors who are looking for dividend income. Their maturity allows them to commit to stable or rising dividend payouts. Once again though, many of the large tech stocks are an exception and do not pay higher dividends.

The very best of these steady dividend payers are called “Dividend Aristocrats.” To qualify for this elite status, a company must be in the S&P 500 and have 25+ years of dividend increases. In 2021, there were 65 of these companies.

The features that define large-cap companies are why investors find them to be key pieces of any portfolio. During periods of volatility in both the economy and the stock market, a large-cap company will usually have an edge over its smaller rivals when it comes to riding out pricing fluctuations or a slowing of the economy.

These larger companies not only have more buying power – allowing them to perhaps cut deals with suppliers or acquire other companies – but also have greater access to capital from banks and the financial markets, which can also help the company survive these trying times and even grow.

Quite often, these companies can also outperform when the economy is on the upswing. That’s due to the fact both investors and other businesses are more willing to deal with larger, more well-known companies.

How To Invest In Large-Cap Stocks

There are a few things to keep in mind regarding investing in large-cap stocks. These stocks generally are geared for the long-term investor rather than the investors who are looking for a quick buy-and-sell trade. However, on occasion, large-cap tech stocks have been exceptions, especially in an environment when interest rates are near zero.

Usually, these stocks are much better suited for a buy and hold strategy, such as the strategies espoused by Warren Buffett and his mentor, Benjamin Graham.

Investors are attracted to large-cap stocks because they can help you diversify your portfolio to help manage risk. On top of that, if you choose to invest in dividend paying large-cap stocks, they can help you generate income too.

Bottom line: large-cap stocks can play an important part in your overall investment strategy. However, it’s important that you diversify your portfolio, so your returns aren’t overly reliant on one specific segment of the market.

The easiest way to buy large-cap stocks is through a mutual fund or ETF. Of course, you can always purchase individual stocks if you do your due diligence. A simple search on your new AI investing app, Magnifi, will introduce you to a few different names for investors to access large-cap funds with low fees.

Give it a try today!

References:

1. “Large-Cap Growth Stocks”, Morningstar.com, https://www.morningstar.com/large-cap-growth-stocks
2. “S&P 500 returns to halve in coming decade – Goldman Sachs”, July 15, 2020, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/s-p-500-returns-to-halve-in-coming-decade-8211-goldman-sachs-59439981
3. “Apple”, Companiesmarketcap.com, https://companiesmarketcap.com/apple/shares-outstanding/
4. “Stock Market Size Categories”, stockmarketmba.com, https://stockmarketmba.com/sizecategories.php
5. “What Are Common Advantages of Investing in Large Cap Stocks?”, August 18, 2022, Investopedia.com, https://www.investopedia.com/ask/answers/041015/what-are-common-advantages-investing-large-cap-stocks.asp
6. “Dividend Aristocrat: Definition, Criteria, Example, Pros and Cons”, July 11, 2022, Investopedia.com, https://www.investopedia.com/terms/d/dividend-aristocrat.asp
7. “Why Do Tech Stocks Go Down When Interest Rates Rise?”, April 26, 2023, https://www.marketbeat.com/originals/why-do-tech-stocks-go-down-when-interest-rates-rise/

Disclosures:

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

The Standard & Poor's 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.