Is your portfolio diversified for the ups and downs of the market?
Known as the "only free lunch on Wall Street", diversification spreads out your exposure to market sell-offs and poor business conditions. You may love tech or telecom stocks, for example, but having a portfolio full of them means your returns could take a pounding if something like the year 2000 Tech Wreck were to ever happen again.
Finance schools would like you to believe you have to have dozens of stocks to protect yourself, but that isn't true if you know your stocks well. Billionaire investor Warren Buffett said, "Diversification is protection against ignorance." It's up to investors to research stocks well before investing one dollar.
Below are three stocks that are diversified along industry lines, but also according to different categories of stocks for a variety of growth and income possibilities.
Ramsay Health Care Limited (ASX: RHC) is Australia's largest private hospital operator. Healthcare stocks are typically defensive stocks that aren't affected as much by market ups and downs. Ramsay Health Care is also a growth stock, racking up 20% earnings growth in financial year 2014 as the company expands in Europe and now China.
Super Retail Group Ltd (ASX: SUL), the specialty retailer, is a turnaround stock after a year of sagging share prices and subdued revenue growth. Its store brands Supercheap Auto, BCF, Rebel Sports and Amart Sports could see improved retail conditions with falling interest rates. The stock pays a 4.2% fully franked yield, so term deposit savers could buy Super Retail Group as an income-producing alternative.
Brambles Limited (ASX: BXB) has good exposure to overseas markets with its international supply-chain logistics business. Most of its revenue is generated overseas. Well-known for its CHEP pallet and container brand, Brambles grows the company regularly through acquisition. With a weaker Aussie dollar, the company's overseas generated earnings could get a boost when translated back for reporting. Analysts forecast earnings to grow an average 14% annually over the next few years. It also offers a decent 2.5% yield.
You can use these three as a base for a new portfolio or add them individually to your portfolio for more diversification. I particularly like Ramsay Health Care's international expansion and steady revenue growth.
