- Blue-Chip Stocks
- Real Estate
- Bonds
- Index Funds
- Precious Metals
- Renewable Energy Stocks
- Healthcare Stocks
Blue-Chip Stocks
Blue-chip stocks have historically demonstrated resilience during market declines. For instance, during the 2008 financial crisis, while the overall market dropped by over 38%, companies like Johnson & Johnson (JNJ) and Procter & Gamble (PG) experienced smaller declines and maintained their dividends. From 2009 to 2019, the average annual return of blue-chip stocks like those in the Dow Jones Industrial Average was approximately 12.8%.
Specific Examples
- Apple Inc. (AAPL)
- Stock Code: AAPL
- Price during 2008 Crisis Low: ~$11 (adjusted for splits)
- Current Price (2024): ~$175
- 2008 to 2024 Growth: Over 1400%
- Dividend Yield: ~0.6%
- Microsoft Corporation (MSFT)
- Stock Code: MSFT
- Price during 2008 Crisis Low: ~$15
- Current Price (2024): ~$310
- 2008 to 2024 Growth: Over 1900%
- Dividend Yield: ~0.9%
- Johnson & Johnson (JNJ)
- Stock Code: JNJ
- Price during 2008 Crisis Low: ~$50
- Current Price (2024): ~$160
- 2008 to 2024 Growth: Over 220%
- Dividend Yield: ~2.7%
Dividend Payments
One of the key benefits of blue chip stocks is the stability of their dividend payments. Businesses such as Coca-Cola (KO) and McDonald’s (MCD) have paid dividends for decades, and have increased the payouts for just as long, offering steady income to investors, even when the market is shaky. For example, Coke has raised its dividend for 59 years in a row.
- Coca-Cola (KO)
- Stock Code: KO
- Price during 2008 Crisis Low: ~$20
- Current Price (2024): ~$60
- 2008 to 2024 Growth: Over 200%
- Dividend Yield: ~3.1%
- McDonald’s (MCD)
- Stock Code: MCD
- Price during 2008 Crisis Low: ~$55
- Current Price (2024): ~$280
- 2008 to 2024 Growth: Over 400%
- Dividend Yield: ~2.1%
Strong Financial Health
Blue-chip companies are this secure-financial-health kind of companies that usually have huge piles of cash in their bank and very low or zero debt. They are financially more stable, and consequently much better able to survive economic downturns than the smaller, often fledgling companies. Think of Apple during one of their many market downturns, having a war chest of over $200 billion, which they could tap into while reinvesting in innovation and growth.
Real Estate
Real estate is considered a resilient asset class that has consistently produced stable returns often during market headwinds. In 2008, for example, real estate lost far less value than the stock market — and also rebounded quicker in many regions. During this time, inflation averaged 1-2%, and the average annual residential real estate return for 2000 to 2020 was 3-4%.
Income Generation
Rental Income — Rental income is generated as a result of real estate investments, and it gives you the ultimate cash flow stability, even during economic recessions. The average rental yield in the U.S. was 7.5% in 2023, significantly higher than the more than 1.7% average dividend yield of the S&P 500.
For example: If a property was acquired for $300,000, it would earn $22,500 in annual rental income (7.5% yield). This rental income can go a long way to help recoup any property value loss temporarily incurred and create more constant income streams.
Growth Potential
Home prices tend to rise an average of 4.7% annually in the U.S. over the 10-year period from 2010 to 2020.
For instance: If that same home was bought in 2010 for $250,000, it might be worth about $391,000 by 2020 with an appreciation rate of 4.7% per year.
Tax Benefits
Real Estate Tax Advantages that Can Improve Returns
- Mortgage Interest Deduction: Real estate investors are allowed to deduct their mortgage interest payments from taxable income.
- Depreciation: Just another of your non-cash deductions that can slide what appears to be small line-items down a little and give your grandmother more money for Bingo.
- Up to $250,000 (or $500,000 for married couples) of capital gains on the sale of a primary residence is excluded from taxes.
Real Estate Investment Trusts (REITs)
Suitable For…Ownership based Funds: For those who prefer to stay out of the physical real estate space, REITs provide an alternative in the area of real estate asset investing without all of the pesky property management. Historical returns of REITs: To date, REITs have had an average annual return of about 11.8 percent from 1990 to 2020.
Notable examples include:
- Public Storage (PSA): Self-storage properties have been consistently high yield providers.
- Prologis (PLD): Industrial real estate and logistics facilities, benefiting from growth in e-commerce.
Bonds
During periods of economic uncertainty, bonds typically do well. In 2008, during the last financial crisis, the S&P 500 lost almost 38.5%, but U.S. Treasury bonds went up in value. The stability a group of bonds can bring to a portfolio is noteworthy. For instance, in 2008, it was only ranked at 5.24 percent, which is significantly less compared to other assets.
Income Generation
Regular Income Stream — Bonds pay interest payments known as coupon payments, which can be very beneficial in providing steady payments to fund your lifestyle. A direct investment in a bond with a 3% annual coupon rate will, for example, return you $300 each year on $10,000 invested.
Types of Bonds
Additional Reading: Treasury Bonds — One of the most secure investments around, issued by the U.S. government. They have the full faith and credit of the U.S. government behind them. 10-Year Treasuries yield a reliable, risk-free return of 2%, for example.
Municipal Bonds: Secured by a state, city, or other local government entity. Municipal Bonds are issued by state and local governments (cities, hospitals, schools, etc.) and often offer tax advantages, being exempt from federal taxes and sometimes even state/local taxes, too. Example: California Residents can use a municipal bond from the state of California with a 3% yield for tax-free income.
Corporate Bonds: Companies issue bonds to raise capital. They often pay higher yields relative to government bonds but carry more risk. Example: A 3.5% yield corporate bond from Apple Inc. may be cheaper than government bonds with a bit more risk.
Risk Mitigation
Bonds may help smooth the stock market temperatures. Investors tend to turn to fixed-income securities, such as bonds, when stock prices are falling. For instance: From 2000 to 2002, the dot-com crash dragged the S&P 500 down by roughly 44%, but the Bloomberg Barclays U.S. Aggregate Bond Index eked out a mild positive return in each of those years. The average annual return was about 10%.
Steps to Investing in Bonds
- Establish Your Investment Goals: Define your risk tolerance, investment horizon, and income needs.
- Select Bond Types: Depending on how you best tolerate risk – and what your tax situation is – choose from government, municipal, or corporate bonds.
- Variety in Bond Holdings: Opt for a combination of issuers, maturities, and sectors, while investing in bonds, to reduce your risks. For example: 50% to Treasury bonds, 30% to municipal bonds, and 20% to high-quality corporate bonds.
- Ladder Your Bonds: Purchase bonds with different maturities to diversify your exposure to interest rate risk and preserve flexibility. Sample: Create a bond ladder where each bond has a maturity of 1, 3, 5, 7, and 10 years.
Index Funds
Index funds track the performance of a specific market index, such as the S&P 500. During market downturns, they tend to perform better than many actively managed funds due to their diversified nature and lower costs.
For instance, during the 2008 financial crisis, the S&P 500 index fell by approximately 38.5%. However, by staying invested, those who held S&P 500 index funds saw substantial recovery. From March 2009 to December 2019, the S&P 500 returned about 300%, averaging around 13.6% per year.
Low Costs
One of the main advantages of index funds is their low expense ratios. Since they passively track an index rather than actively manage investments, the costs are significantly lower. The average expense ratio for an index fund is about 0.15%, compared to 0.67% for actively managed funds.
Examples of Popular Index Funds
- Vanguard 500 Index Fund (VFIAX)
- Expense Ratio: 0.04%
- Tracks: S&P 500
- 5-Year Average Return (as of 2023): ~10.7%
- Schwab Total Stock Market Index Fund (SWTSX)
- Expense Ratio: 0.03%
- Tracks: Entire U.S. stock market
- 5-Year Average Return (as of 2023): ~10.5%
- Fidelity ZERO Total Market Index Fund (FZROX)
- Expense Ratio: 0.00%
- Tracks: Entire U.S. stock market
- 5-Year Average Return (as of 2023): ~10.4%
Benefits During Market Downturns
- Automatic Reinvestment: Index funds typically reinvest dividends, allowing investors to take advantage of compounding returns.
- Example: A $10,000 investment in an index fund with a 2% dividend yield can generate $200 in dividends, which are reinvested to buy more shares.
- Consistent Performance: By mirroring the index, these funds provide consistent performance relative to the market, avoiding the pitfalls of poorly timed stock picks.
- Example: During the tech bubble burst, many tech-heavy funds lost significantly more than the broader market. An S&P 500 index fund, however, mirrored the market’s overall performance and recovered with it.
Precious Metals
Precious metals have shown resilience during economic downturns. For example, during the 2008 financial crisis, while the S&P 500 lost nearly 38.5%, gold prices increased by about 25%. From 2008 to 2011, gold prices rose from around $800 per ounce to over $1,900 per ounce.
Inflation Hedge
Precious metals act as a hedge against inflation. When inflation rises, the value of paper currency falls, but the value of precious metals tends to increase.
For instance, during the high inflation period of the 1970s, gold prices soared from $35 per ounce in 1971 to $850 per ounce in 1980. This 2300% increase provided a significant hedge against inflation, which averaged around 7% per year during that decade.
Diversification
Including precious metals in your investment portfolio can provide diversification benefits.
For example:
- During the dot-com bubble burst from 2000 to 2002, while the stock market declined by about 45%, gold prices increased by approximately 12%, providing a buffer against market losses.
Examples of Precious Metals Investments
- Gold Bullion
- Price (2024): ~$1,950 per ounce
- 5-Year Performance (2019-2024): ~35% increase
- Use Case: Long-term store of value and inflation hedge
- Silver Coins
- Price (2024): ~$25 per ounce
- 5-Year Performance (2019-2024): ~45% increase
- Use Case: More affordable entry point for investors and industrial applications
- Platinum ETFs (e.g., Aberdeen Standard Physical Platinum Shares ETF)
- Price (2024): ~$1,000 per ounce
- 5-Year Performance (2019-2024): ~25% increase
- Use Case: Exposure to platinum without needing physical storage
Investing in Precious Metals
- Physical Bullion and Coins: Purchase physical gold, silver, or platinum in the form of bars or coins.
- Example: Buy American Gold Eagles or Canadian Silver Maple Leafs from reputable dealers.
- ETFs and Mutual Funds: Invest in ETFs or mutual funds that track the price of precious metals.
- Example: SPDR Gold Shares (GLD) or iShares Silver Trust (SLV).
- Mining Stocks: Invest in companies that mine precious metals.
- Example: Barrick Gold Corporation (GOLD) or Newmont Corporation (NEM).
Renewable Energy Stocks
In the last decade, renewable energy stocks have performed quite well. Specifically, the iShares Global Clean Energy ETF (ICLN), which follows a market index composed of global renewable energy firms, returned an annual return around 2.12% from 2010 to 2020.
Demand for Renewable Energy Increases
Renewable energy is becoming a hotly coveted technology as the entire world re-analyzes its power sources in the bid to cut its carbon emissions to stave off a climate emergency. Solar Panel and Wind resolve leading to Solar and Wind Power. Two of the favorites for energy investments are Wind Generation and Solar Panels.
For example: Solar Energy — Over the last decade, the price of solar photovoltaic (PV) panels has dropped more than 80% since 2010, providing people access to solar power. As such, companies like First Solar (FSLR) and Enphase Energy (ENPH), among others, have been the beneficiaries of this development.
Wind Energy — Advancements in wind turbine technologies have reduced the prices and maximized their yield. Key players in this space include Vestas Wind Systems (VWDRY) and Siemens Gamesa (SGRE), which are positioned to take advantage of the worldwide move to wind power.
Incentives and Policy by the Government
Global Governments are offering Policies and Incentives to foster Renewable Energy. For example, the U.S. has extended the Investment Tax Credit (ITC) for solar energy projects, which is a 26% tax credit for systems installed before 2023.
In Europe, the Green Deal targets for the EU to achieve net zero carbon emissions by 2050, pushing towards more renewable energy projects.
Renewable Energy Stocks Examples
NextEra Energy (NEE)
- Market Cap: ~$160 billion
- 5-Year Average Return (2018-2023): At least 20% per year
- Key Issue: Leading U.S. wind and solar power producer
First Solar (FSLR)
- Market Cap: ~$15 billion
- Average Return (2018-2023): ~18% p.a. for 5 years
- Focus Area: Solar Panels manufacturer and Utility-scale PV Power Plants Provider
Vestas Wind Systems (VWDRY)
- Market Cap: ~$35 billion
- 5-Year Average Return (2018-2023): ∼15%/yr
- Coverage: World leader in the manufacturing and installation of wind turbines.
Investment Strategies
It is always important to diversify even further by investing in the different types of renewable energy (wind, solar, hydro) within the same sector to minimize your risk.
Tips:
- APL: 40% to solar, 40% to wind, 20% to other renewable energy (i.e., hydro or geo-minted).
- Allocate to ETFs: You can go for ETFs focused on renewable energy like iShares Global Clean Energy ETF (ICLN) or Invesco Solar ETF (TAN) to have a broad exposure to the sector.
- Example: Buy $10,000 of ICLN to own a diversification of the best global renewable energy companies.
- Check government policies: Invest in companies that have policies favorable for them.
- For instance, record updates related to the ITC or European Green Deal.
- Technology Leaders: Invest in leading renewable energy tech companies.
- For example, Enphase Energy (ENPH) has developed advanced microinverter technology for solar energy.
Healthcare Stocks
Healthcare stocks have historically shown resilience during market downturns. For example, during the 2008 financial crisis, while the S&P 500 fell by approximately 38.5%, the healthcare sector, represented by the Health Care Select Sector SPDR Fund (XLV), declined by about 22%, demonstrating relative stability. From 2010 to 2020, healthcare stocks provided an average annual return of around 12%.
Continued Demand for Healthcare Services
The demand for healthcare services and products remains steady even during economic downturns. Aging populations, ongoing medical needs, and the continuous advancement of medical technology drive this demand. For example, the global population of people aged 65 and older is expected to reach 1.5 billion by 2050, increasing the need for healthcare services and pharmaceuticals.
Examples of Healthcare Stocks
- Johnson & Johnson (JNJ)
- Market Cap: ~$430 billion
- 5-Year Average Return (2018-2023): ~10% annually
- Focus: Pharmaceuticals, medical devices, and consumer health products
- Pfizer Inc. (PFE)
- Market Cap: ~$220 billion
- 5-Year Average Return (2018-2023): ~9% annually
- Focus: Pharmaceuticals and vaccines, including the COVID-19 vaccine
- UnitedHealth Group (UNH)
- Market Cap: ~$500 billion
- 5-Year Average Return (2018-2023): ~20% annually
- Focus: Health insurance and healthcare services
