5 stocks to diversify your portfolio

Investors are being reminded of the risks involved in investing on the stock market.

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Its been a shaky start for global equity markets in 2014 and investors are being reminded of the risks involved with investing in the stock market, many of which were virtually forgotten in 2013 as the US Federal Reserve’s bond-buying program fuelled equity markets around the globe.

In 2013, the level of volatility that hit markets was unbelievably low and many Australians recognised enormous gains, far exceeding those that would have been recognised from buying bonds or investing in a term deposit. However, with the Fed now tapering its easy money program, Chinese manufacturing data showing signs of weakness and investor confidence turning to fear, the S&P/ASX 200 Index (Index: ^AXJO) ASX: XJO) has already conceded 5.3% this year compared to last year’s 15% gain.

As such, we have been reminded of the importance of diversification – that is, not putting all your eggs in one basket. Investors should ensure their portfolio maintains a strong core (made up of well-established companies) as well as growth prospects, while the odd small-cap stock could also take your portfolio a long way. Here are five companies to consider adding to your portfolio today:

Core:

Telstra Corporation Ltd (ASX: TLS): The telecommunications behemoth is one of Australia’s most widely held stocks and would be perfect to strengthen your portfolio against volatility. It is currently trading at $5.05 per share and still has enormous growth opportunities ahead of it whilst also offering an incredible fully-franked 5.6% dividend yield.

BHP Billiton Limited (ASX: BHP): The mining giant didn’t have the greatest year in 2013 but is pegged to bounce back strongly as it continues to cut costs and increase productivity while it is also heavily ramping up production levels. The miner’s operations are far more diversified than rivals such as Rio Tinto Limited (ASX: RIO) or Fortescue Metals Group Limited (ASX: FMG), making it the safest option from the mining sector.

Growth:

Collection House Limited (ASX: CLH): More and more companies are outsourcing their receivables management tasks to specialist companies like Collection House who stand a greater chance at collecting the debts. The debt collector has shown impressive growth in recent years including a 23% increase in net profit after tax in 2013. Its shares are currently trading at $1.80 on a P/E ratio of 12.6, making now an excellent time to buy into this growth story.

M2 Group Ltd (ASX: MTU) (formerly M2 Telecommunications Group Limited): In recent years, the telco has grown acquisitively having bought well-known businesses like Dodo and Primus, however, its focus will now switch towards paying off its debt and growing organically. The telecommunications industry is booming and M2 could be an excellent way to capitalise.

Small-Cap

Nearmap Limited (ASX: NEA): The Australian mapping company provides high resolution maps of Australian towns, covering 85% of the population. Its customer base is growing rapidly and it recently signed a licensing agreement with Google Maps which will enhance the user’s map-viewing experience. To give an indication of the returns that small-caps can deliver, Nearmap gained in excess of 700% in 2013 as investors recognised its potential, but I believe there are still gains to be recognised (particularly if the company decides to venture outside of Australia).

Foolish takeaway

Investing great Peter Lynch once said: “In this business, if you’re good, you’re right six times out of 10. You’re never going to be right nine times out of 10.” Diversification is one of the best tools you have to ensure you succeed at investing.

Motley Fool contributor Ryan Newman owns shares in Collection House.

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