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.
Another high quality share that could be good to invest in today is this industry leader which is now expanding into Asia.
You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!
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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited and InvoCare Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited and MNF Group Limited. The Motley Fool Australia owns shares of Citadel Group Ltd and National Australia Bank Limited. The Motley Fool Australia has recommended InvoCare 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.