Although “Grandpa Stocks” have fallen out of favor with investors the last few years, that does not mean they should be simply dismissed due to not being huge profit makers.
All stocks are subject to moving in and out of investors favor for varying reasons over time. However, if you own a Grandpa stock this isn’t the time to sell, in fact I feel its the time to buy. (Seeking Alpha, “Buying Grandpa Stock is the Better Thing To Do)
Especially in this volatile economic climate, now is definitely not the time to sell your Grandpa Stocks. The type of stocks characterized as “Grandpa” are found mostly in the large cap value of the market. At the start of last year, the large cap value of the U.S. Stock market has been significantly under performing in comparison to the S&P 500 Index it is doing 50% less growth, and has actually had a return of three times since the start of 2017.
These slow returns can cause investors to lose patience and want to sell these old stocks, enticing them to purchase stocks in the growth industry that have a tendency to produce higher returns, which also comes with a higher risk factor.
So here are the reasons to continue to your grandpa stocks:
First is lower risk, investors should buy not sell these stocks because the large cap value provides much more stable returns over a period of time. Next is the diversification benefit, i know many of you may ask, shouldn’t investors be fully allocated to small cap growth rather than large cap value? If you are looking at this from a risk return perspective the answer is no. Even giving small cap growths potential for constant out performance in comparison to large cap growth, the optimal portfolio mix is still when considering a risk-adjusted standpoint, would be two thirds to small cap growth and one third to large cap value.
Lastly, there is the long term performance factor. When you consider the history of a stock over a long term period of time, the reason that these “grandpa” stocks have been owned for so long becomes easy to see. For example, for the last 36 years from 1982 until today, large cap value has generated an annual return of 12.92% with a standard deviation of returns of 14.52% versus small cap at a value of 12.50 and a standard deviation of 20.11%. Lower returns at at higher risk lead too a portfolio with only large cap value over this time period.
Its important to realize that “Grandpa” has had great success in owning these conservative stocks over the years for a reason. The reason is the stocks do deliver enticing long term profits over time and they do so with considerably less risk.