Low-cost index funds are a great idea for most investors. Good diversification and exposure to the long-term benefits of shares can't really be beaten.
However, by buying the index I think investors lose out on the stronger returns of the good shares. It could be possible to buy a limited number of shares and still create good diversification, but generate much higher returns.
Here's five that would be a strong, diverse group:
Macquarie Group Ltd (ASX: MQG)
Macquarie is Australia's diverse bank. Unlike Australia's big four banks who rely on most of their earnings coming from Australian loans, Macquarie doesn't.
It generates around two thirds of its earnings from overseas and has moved its focus away from cyclical businesses and instead built up its asset management business.
Ramsay Health Care Limited (ASX: RHC)
It's hard to look beyond Ramsay as one of Australia's best healthcare businesses. It has operations in several countries and high-quality management.
The long-term ageing demographics of Australia should help Ramsay grow earnings for many years to come.
Altium Limited (ASX: ALU)
Altium is one of the best technology businesses on the ASX in my opinion.
It supplies engineers with electronic PCB design software. Organisations like NASA, John Deere, Cochlear Limited (ASX: COH) and ResMed Inc. (CHESS) (ASX: RMD) all rely on its technology.
Management expect that revenue will double over the next few years, which could mean Altium provides more growth for shareholders if this happens.
National Veterinary Care Ltd (ASX: NVL)
This fast-growing vet business is acquiring vet clinics and then implementing its practices to boost efficiencies and profit.
National Vet Care should be much harder to disrupt by online shopping because pets must be physically helped at the clinic.
Bapcor is the largest auto parts business in Australia with its profitable Burson brand.
Auto parts is a defensive business because cars always need parts replacing. In-fact, recessions could be a boom time for Bapcor because car owners will try to make their vehicles last longer.
Foolish takeaway
Buying these five businesses alone creates a diversified portfolio with a lot of potential growth, much better than the Australian index in my opinion.
At the current prices I think that only Ramsay and Bapcor are buys today, the other three are a bit expensive.
