Compared to other assets shares are seen as risky. It’s true that shares are more volatile than cash, bonds and property, but for the most part shares have delivered the better returns over the long-term.
However, not every share offers the same risk and opportunities. If you invest in large blue chips then the risks may be lower but the potential rewards are definitely lower. I can’t imagine Commonwealth Bank of Australia (ASX: CBA) or Woolworths Group Ltd (ASX: WOW) delivering compound returns, excluding franking credits, of more than 10% over the next couple of years.
However, if you fill your portfolio with high-risk shares like FBR Ltd (ASX: FBR) and Catapult Group International Ltd (ASX: CAT) there’s a chance one or two may be big performers, but others could also halve in value in more.
I think the best thing to do is to aim for asymmetric returns. That means where the possible returns are much greater and more likely than the downsides.
For me, the best asymmetric returns can come in two forms. Either the shares are very attractively valued or offer excellent long-term growth prospects.
The cheaper the price you can buy your target share at, the bigger margin of safety you give yourself. Investors can do all the analysis they like, but it’s ultimately about achieving the best purchase price that decides returns. Meaning you need the cash and the ‘bravery’ to buy.
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*Returns as of June 30th
Motley Fool contributor Tristan Harrison owns shares of Challenger Limited and Paragon Care Limited. The Motley Fool Australia owns shares of and has recommended Catapult Group International Ltd and Challenger Limited. The Motley Fool Australia owns shares of Citadel Group Ltd. The Motley Fool Australia has recommended Paragon Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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