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Penny Stocks or Blue Chip?

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I was in a good mood this morning after I heard some good news before I was going to meet a friend from army days. During the journey to meet my friend I saw a hearse on the streets and it made me pensive till I actually got lost in this place called Woodlands and had to take a cab to reach my destination.

During the meeting with my friend, I saw that he had quite a few penny stocks that he was holding on to. He had mentioned that his stocks were losing money and that he had held on to them for a while now. He was kind enough to show me the stocks that he was still holding and I was actually happy for him that his paper loss in his portfolio was not as high as what I thought it was when he mentioned it. Another good thing about it was that he was still positive about stocks and shares and still invested in it and in fact for some counters he even made a tidy profit on it (ie more than 6000 profit).

My advice that I blurted out to him was that he should have his stock holdings in blue chips. However, he replied that he did not have the funds to buy blue chips. Actually, this would be a cue for me to introduce to him the benefits of unit trusts, but I thought I should not be too pushy, after all, he only wanted to open a stock trading account. Maybe I should sent him this blog address so that he can find out more about unit trust as he said that he didn't know much about it.

So is penny stocks necessarily so bad for me to remark to him that he should hold blue chip stocks? Actually, I should have said to keep a portion of his holdings in blue chips. Because of the issue of diversification. Remember that you need to spread your risk, so you shouldn't be holding all penny stocks, neither should you be holding all blue chips to have a truely diversified portfolio.

In Singapore's context, a penny stock is a stock whose value is below $1. And a blue chip stock is a company which is easily recognised by ordinary people on the street and which is very credit worthy company, market capitalisation of at least a billion and also the leading company in its field. Actually it is pretty obvious from just the definition, which is the stock you would rather hold. However, one should not look down on penny stocks as a lot of the blue chip companies were once penny stocks (not all companies were like the dot.com companies like Yahoo and Google whose stocks were in stratosphere even before listing) and if you were able to find one such penny stock and hold it all the way to the stratosphere, you will be a very lucky person and should have no worries about your retirement.

My thinking is that when you are just starting to invest, most people would have a lot of penny stocks and hear a lot of 'inside' information from friends and people, but I would think that a starting investor should look at blue chip companies with low prices as they are stable companies from which to learn what investing is all about and put aside about 10% for speculative penny stocks. As you become a little more experienced, you can increase the percentage put to penny stocks to anything up to 40% of your portfolio (when the market is still in the bull phase). Then when you are 5-8 years away from retirement, you should be channelling money out from the stock market and looking to put more money into bonds and less risky investment tools and also changing your porfolio of stocks to high price, very stable blue chip companies with a long record of dividends and growth. At this time, your investment in penny stocks should fall below 5%.

So it becomes like a life cycle of investment and it will ensure that your time from retirement to the time you need to go is as comfortable as possible.

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1 comments:
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joelarthur25 said...
February 4, 2011 at 1:00 AM  

If you want to make really high returns and have a lot of time to investigate the penny stocks, I would say go for them.

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