Making a profit in most instances involves a risk and at the very least a trade-off. While a government bond can be considered 'risk-free' it still involves the trade-off of potentially missing higher returns from alternative, riskier investment options.
Consideration of risk should also play a role in portfolio construction. For example, let's assume I have just been handed $6,000 to invest in the stockmarket. I've got a long time horizon – I want to invest the money for a decade. I'm not looking for a quick buck but rather I want the $6,000 portfolio to grow meaningfully over the next ten years – so I want to invest in growth stocks.
The first stock I'm keen to buy is Computershare Limited (ASX: CPU). I like its global growth potential, think it is reasonably priced, has a strong balance sheet and capable management. It's a reasonably large company with a market capitalisation of $7 billion and as my other two stock choices are small stocks. I'll look to invest $3,000 in Computershare.
The other two stocks I want to buy are Virtus Health Ltd (ASX: VRT) and Freedom Foods Group Ltd (ASX: FNP). Virtus has a market capitalisation of $620 million and I consider its exposure to the IVF market both in Australia and overseas offers solid growth opportunities, but also defensive earnings which leads me to allocate $2,000 to this stock.
Finally, although Freedom's $430 million market capitalisation isn't in many respects that far behind Virtus, I consider the company's earnings to be less secure and the stock higher risk from an operational point-of-view and from a valuation perspective. Despite these concerns Freedom offers exposure to the fast growing specialised food industry which has large growth potential, as such I'd allocate my last $1,000 purchasing stock in Freedom Foods.
