Every year I see people reluctant to invest in shares because it's perceived as too "risky". However, it's important to note that there are many ways in which investors can reduce their downside risk.
I've always been a supporter of diversification and I think it's the single most important investing principle. However, there's another way to limit your downside risk. Looking for companies that seem to thrive in times of economic distress is an even smarter strategy investors can adopt in order to gain the full benefits of an upturn, while limiting downside risk.
Identifying companies that offer value at current prices is the hard part. So here are three stocks that I think offer solid long-term growth prospects, while also protecting you from market turbulence. With the S&P/ASX200 (INDEXASX: XJO) falling over 5% last week, this may be a wake-up call to stock up on some growth stocks.
1. When the economy falters, credit card limits run overdue and consumers find it harder to pay bills off. That's when debt collection company Collection House Limited (ASX: CLH) starts to benefit. With an all-growth orientation from management, Collection House will not only protect your portfolio but also drive it higher. Trading on an attractive price-to-earnings ratio of 13.72 and offering a 4% fully franked dividend yield, Collection House is a stock to hold on to.
2. Litigation funder Bentham IMF Ltd (ASX: IMF) is one of the few companies which actually gained momentum during the GFC. Bentham provides third-party funding for legal cases for a share of proceeds if it's successful. Management's strict policies in its case selection gives it a competitive advantage that is extremely hard to replicate. In fact, over the past 12 years Bentham has achieved a 96% success rate from 155 cases.
Bentham trades on a forward price-to-earnings ratio of 9.9 and offers a juicy 5% fully franked dividend yield. With solid competitive advantages and a business model that seems to thrive in all economic conditions, Bentham is a top buy.
3. Miners all around the world may be feeling the pinch because of weaker commodity prices. But it's important to appreciate the countercyclical properties gold miners like Newcrest Mining Limited (ASX: NCM) provide. In times of economic uncertainty, there's a rush to buy commodities like gold and this pushes its price up. Ultimately, this means Newcrest can reap higher realised gold prices and lift its sales. Furthermore, its geographically dispersed production base dampens its downside risk even further and adds an element of diversification to investors' portfolios.
While it may trade on a hefty price-to-earnings ratio of 20, its future growth potential and countercyclical properties provide investors with a solid buy-and-hold opportunity.
