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Are blue-chip stocks the best way to retire comfortably?

Investors who want to retire comfortably are obviously looking to own stocks that will grow in value and provide them with a decent return over the long term.

For obvious reasons, the Global Financial Crisis (GFC) scared many investors and sent them piling into the perceived safety of blue-chip stocks. The other factor which has also encouraged ownership of blue-chips is low interest rates which have forced investors to seek their income from dividends.

While to date this strategy has paid off handsomely with the S&P/ASX 100 Index (Index: ^AXTO) (ASX: XTO) rallying 69% since the depths of the GFC in March 2009, the problem facing investors now is whether they can expect a reasonable future return from blue-chips which by-and-large appear to be fully valued.

A case in point is Telstra Corporation Ltd (ASX: TLS). With the exception of the height of the bull market in 2007, the telco has historically traded on a trailing price-to-earnings ratio between of 11.7x and 14.2x (from 2005 to 2012). In 2013 the multiple increased dramatically to 15.6x and today it trades at 17x, according to research by Morningstar.

While ultimately the make-up of a portfolio will depend on an individual’s personal circumstances, in general the question should be asked whether some investors would be better served by owning a portfolio of smaller, undervalued stocks which have the potential to grow meaningfully by retirement, rather than settling for what could be meagre returns from fully-valued blue-chip stocks.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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