Many investors have gotten used to barely any volatility in markets over the past few years.
Some people think the low volatility was due to the large amounts of quantitative easing from central banks. Whatever the reason, it seems rising interest rates are sending volatility up again.
Warryn Robertson from Lazard Asset Management believes that investors need to set realistic return targets for the current economic environment.
Lower returns from financial assets should be expected, even without considering the tariffs and trade wars going on between the US and China. Mr Robertson thinks that past returns are unlikely to continue, at least for the medium-term.
He suggested four things to do for how to adapt portfolios:
- Focus on the right companies, higher quality names with more predictable earnings
- Focus on valuation. Invest in the right companies, but only at the right prices
- Diversify sensibly, not naively. A widely diversified portfolio perversely may be more risky than a concentrated portfolio
- Remember that currency could play a major role. Investors should consider currency in their process
Everyone's definition of quality is different, but it's possible to create a good diversified portfolio with perhaps only 10 to 15 shares if they are all exposed to different risks.
Investing in Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Group (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) may be choosing four different shares, but they are all exposed to the same risk of housing.
What are some quality names?
With an investment timeframe of least three years in mind it could be quite simple to beat the ASX with quality shares. If you already own a portfolio of quality shares, then the best thing to do may be nothing.
Some of the names I'd consider at the current prices are Challenger Ltd (ASX: CGF), InvoCare Limited (ASX: IVC), Citadel Group Ltd (ASX: CGL) and MNF Group Ltd (ASX: MNF).
