Earlier this week I made the case for the importance of owning ASX listed healthcare stocks if you're serious about growing your wealth and smashing the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). Healthcare, I argued, is the only game in town.
The numbers behind global healthcare spending are truly staggering and it will keep growing over the next decade as people age and prioritise a higher standard of living. So how do we take advantage of this?
Buy the index
One way would be to just buy and hold all of the 18 companies that make up the S&P/ASX 200 Health Care Index (Index: ASX: XHJ). A list of the current members can be found here.
Buying the companies that make up the index would give us exposure to the biggest ASX listed healthcare companies, with the exception of curveball Greencross Limited (ASX: GXL), which actually runs a range of veterinary clinics and pet stores.
There are a few challenges with this approach. For one thing, it's blunt and ignores the actual valuations of the individual companies. For us individual investors it's also tough to splurge cash on 18 different companies with limited funds and paying brokerage on each.
A third issue is that this approach restricts us to selecting from just a handful of the many healthcare companies available on the All Ordinaries Index (INDEXASX: XAO). Healthcare IT, for example, an area set to receive billions of dollars in investment over coming years, is not represented at all in the S&P/ASX 200 Health Care Index.
Buy what you know
One alternative is to follow the lesson of legendary investor Peter Lynch who suggested buying companies you know.
Being familiar with the quality of a company's products or its level of service will give you a strong idea about whether you would want to own the company.
Perhaps a family member has used a ResMed Inc. (CHESS) (ASX: RMD) CPAP machine, takes Mayne Pharma Group Ltd (ASX: MYX) aspirin, or you recently went to a Primary Health Care Limited (ASX: PRY) medical centre. This can be a great starting point for further investigation.
Picking your own
Even if you don't have direct experience with a company, you can still pick one which suits your portfolio. Analysts call this a 'top down' process.
Start by thinking about the characteristics you're looking for to help filter through the wide range of companies.
Are you looking for a steady cash-flow machine paying out high dividends, or are you comfortable taking more risk to own a fast growth company with formidable future earnings?
For example medical centre operator Primary Health Care pays a dividend of around 4% and has a relatively conservative price to earnings (p/e) ratio of 15, compared to the average S&P/ASX 200 Health Care Index of 26.
Alternatively, Orion Health Group Ltd (ASX: OHE) is aiming for big growth tackling the US$50 billion IT infrastructure side of healthcare, but reported an operating loss for the full 2015 financial year.
Whichever approach you take, having exposure to the growing demand for healthcare products, services and infrastructure is a smart strategy for long-term investors.
