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Here’s why I think you should avoid big blue chips

Tristan Harrison

One of the longest-accepted pieces of advice has been that investing in blue chips will secure long-term wealth for your portfolio and your family. Most blue chips have been good investments over the past 20 years.

Australia has three main groups of blue chips. One group is the big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australian Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Macquarie Group Ltd (ASX: MQG).

The second group is retail-related shares like Wesfarmers Ltd (ASX: WES), Woolworths Limited (ASX: WOW) and Scentre Group (ASX: SCG).

The third group is resource shares like BHP Billiton Limited (ASX: BHP), Rio Tinto Ltd (ASX: RIO), Woodside Petroleum Limited (ASX: WPL) and South32 Ltd (ASX: S32).

There are also shares in individual industries that are in the ASX20 like Telstra Corporation Ltd (ASX: TLS), CSL Limited (ASX: CSL) and Transurban Group (ASX: TCL).

These are all recognisable names and are huge businesses in Australia. Most of them have been good investments if you’re a long-term shareholder.

The problem I see is that because they already dominate the industries they’re in, so there is little potential growth on offer beyond population growth. It would be hard for the big four banks, Woolworths or Telstra to increase their market share much higher.

The other big problem I see is that there are competitors looking to steal their market share. Amazon and other online retailers could really hurt Wesfarmers and Woolworths in the long run. The banking commission, regulators and the general housing market could hurt the big banks. The NBN is hurting Telstra. Renewable energy could hurt BHP and Woodside in the long-term.

Foolish takeaway

There is little ‘upside’ and a lot of ‘downside’ to most of these blue chip shares. They’re not all bad, indeed I think Macquarie and CSL are excellent businesses and have good growth prospects for the next decade. However, for the best chance of market-beating returns, or even just good returns, I’ll be avoiding the rest of the blue chips.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Wesfarmers Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Scentre Group and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.