Most investors will have invariably come across the notion of diversification and its importance in portfolio management.
It is used not only as a risk reduction tool, but effective diversification can also help to reduce the overall volatility of a portfolio.
Although it is widely accepted as being important, the number of shares required to create an acceptable level of diversification is more controversial.
Some investors advocate having a portfolio of at least 30 shares, while Warren Buffett himself is quoted as saying: "Wide diversification is only required when investors do not understand what they are doing."
Personally, I believe a portfolio of around 20 shares is more than enough for most individual investors as it offers the safety of diversification without limiting the potential of big gainers to boost overall returns.
So with that in mind, here are eight shares that could be used as the building blocks for a diversified share portfolio:
REA Group Limited (ASX: REA) – REA Group is one of the few ASX-listed companies with an economic moat. It is the clear market leader when it comes to residential real estate advertising in Australia and is well on its way in developing its operations abroad.
CSL Limited (ASX: CSL) – CSL has a number of potentially game changing treatments in its development pipeline and this makes it one of the most sought after healthcare companies on the ASX. The shares may appear expensive at the moment, but its earnings are expected to accelerate from FY17 onwards as new treatments come to market.
Platinum Asset Management Limited (ASX: PTM) – Modest fund outflows, recent fund underperformance and fears of a 'Brexit' have seen the share price fall by around 21% since the start of the year. These appear to be short term factors, which means now could be a great time to pick up the shares at a discount.
Macquarie Group Ltd (ASX: MQG) – Macquarie does not face the same headwinds as the big four banks and is also well positioned to benefit from a lower Australian dollar.
Mantra Group Ltd (ASX: MTR) – As a leading provider of accommodation throughout Australia, Mantra provides investors with exposure to Australia's booming tourism sector. The shares also appear to be attractively valued compared to other companies in the sector.
Freelancer Ltd (ASX: FLN) – Freelancer is the most speculative share on this list but has the biggest potential to deliver explosive returns. The company is directly leveraged to the growing trend of businesses outsourcing their jobs while simultaneously creating a powerful network effect.
Telstra Corporation Ltd (ASX: TLS) – Telstra might not be the most exciting share on the ASX but that is one of the features that makes it attractive. Investors can be confident they will receive a solid dividend, while also benefiting from lower levels of volatility.
Vanguard MSCI Index international Shares ETF (ASX: VGS) – It is important for all long term investors to have some exposure to international equities. The easiest way to do this is through an ETF like the one provided by Vanguard. This ETF provides exposure to many of the world's largest companies listed in major developed countries for a fee of just 0.18% p.a.
