Question: If or when the stock market(s) take a dive, should someone waiting for this event, holding a large percentage of cash, buy into the ASX 20/50 or buy smaller companies outside the top 50? That is, in light of the dismal returns of most of the “blue chips” over the last few years, should we use the next decline to buy those companies with recent proven growth returns, or just buy the usual suspects and wait for the market to return?

Answer (by Paul Rickard): You ask a really good question, and I think the answer depends somewhat on your starting point, and time frame.

Sure, the top 20 has underperformed over the last two years – but it has outperformed smaller companies over the last 5 and 10 years.

Peter now thinks there is some value in the top 20.

That said, I would always have something invested in smaller companies. You might like to look at my recent article that reviewed some small cap funds.

Question: When you say cyclically inclined stocks – which sectors are you referring to?

Answer (by Paul Rickard): Cyclical stocks/sectors are those that are impacted by the general economy. If the economy is strong, they will do well – and conversely, if the economy weakens, they are impacted.

They are typically stocks that make up sectors like consumer discretionary and industrial .

Discretionary retailers like JB Hi-Fi or Harvey Norman, furniture retailers like Nick Scali, travel companies like Webjet or Flight Centre, gaming companies like Tabcorp are examples.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.