Large-Cap

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

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.

What Is Large Cap Investing?

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

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

Large-cap stocks represent about 93% of the total U.S. stock market, as measured by the Wilshire 5000 Total Market Index.

Since large-cap stocks represent the majority of the U.S. stock market, they are often looked to as core portfolio investments. 

Why Invest in Large-Caps?

Certain characteristics of large cap stocks attract investors. These 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.

• Dividend Payers : Established large cap companies are most often the companies investors choose for dividend income distributions. 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 payers are called the 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 such 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 larger shifts in the economy. Larger companies not only have more buying power – allowing them to perhaps cut deals with suppliers – but also have greater access to capital from banks and the financial markets.

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 Participate in Large Cap Investing

There are a few things to keep in mind with regard to investing in large-cap stocks.

These types of stocks generally aren’t great for investors who are looking for a buy-and-sell at a quick and large profit trade. Although, once again, on occasion, the large-cap tech stocks are exceptions. 

Usually though, these blue-chip stocks are much better suited for a buy and hold strategy, such as 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. And 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. Or, of course, you can always purchase individual stocks, if you do your due diligence.  A simple search on Magnifi indicates numerous ways for investors to access large-cap funds with low fees.

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The information and data are as March 23, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.