Every seasoned investor knows you cannot make a worthwhile investment without accepting some level of risk. When investing in the stock market, risks can be presented in a variety of fashions.
Common types of risk include:
Foreign-exchange risk – fluctuations in currencies can consume profits and make them losses.
Specific risk – does the company have a business model which is unsustainable or fragile?
Country risk – if an Australian company ventures overseas, can it adapt to the different laws and regulations?
Market risk – are the shares traded infrequently resulting in large amounts of share price volatility?
Interest rate risk – some stocks react badly to changes in the official interest rate.
Political risk – is the company likely to suffer from a change in political orientation, e.g. McMillan Shakespeare Limited (ASX: MMS) recently suffered a massive setback in its share price as a result of proposed changes to novated leases by the former government.
All of these types of risk need to be considered before making an investment, but as you can see, it's impossible to avoid them completely. History has shown that although debt is not inherently evil, companies which maintain healthy balance sheets and adapt to changes in the market are most likely to outperform in the long run.
In addition, Aussie investors – like many throughout the world – find comfort investing in businesses they know and use. So when interest rates tumble they're likely to jump on the biggest name stocks. At current prices there are a number of big companies that are relatively safe investments.
Telstra Corporation Ltd (ASX: TLS) is one stock which I am quite bullish on, simply because of its long-term tailwinds and brand recognition. It pays a legendary dividend and has forecast steady earnings growth in the near term – perfect for a long-term income investor.
When it comes to familiarity and simplicity, Woolworths Limited (ASX: WOW) is one stock investors search for. Consistent earnings, coupled with dividends and steady growth, mean it is a stock which could easily find a place in many low risk portfolios.
Another retailer, Coca-Cola Amatil Ltd (ASX: CCL), is one stock which benefits from worldwide legal protection on the distribution of its branded beverages. It has well managed exposure to foreign markets and pays a quality dividend, it can be considered a low risk company.
Mining stocks are generally considered high-risk, high-reward investments, and although history is no guarantee of future success, BHP Billiton Limited (ASX: BHP) has proven to be the most consistent big miner on offer. Unlike Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), it has diversified its earnings across many commodities which limits downside risks considerably.
If a great track record and diversification is what you want, then Washington H. Soul Pattinson & Co. Ltd (ASX: SOL) is what you need in your portfolio. WHSP is one of the oldest stocks listed on the Australian Securities Exchange, but that hasn't stopped it from being innovative and growing profits. In the last decade it has averaged an annual earnings growth of 9.1%.
Foolish takeaway
It's important to remember that no stock is void of risks. The best strategy to avoid risk with publicly listed companies is to buy a good stock at the best possible price. Don't make rushed decisions. Remember patience doesn't lose you money.
