Investors will often hear about the importance of diversification. But what does that really mean?
Diversification basically means spreading your risk over a number of investments rather than exposing all of your capital to one particular asset. In the stockmarket, this can be applied even further by holding a number of stocks that are exposed to different sectors of the economy.
For example, you wouldn't just want to own all of the big banks and nothing else. Sure, you will own four different stocks, but in reality you are completely exposed to the risks of the banking sector.
Instead, investors will often benefit from owning stocks in completely different sectors that are independent of one another.
With this in mind, I have selected 10 stocks in 10 different sectors that a new investor could use as the basis for an instantly diversified portfolio.
Infrastructure:
Sydney Airport Holdings Ltd (ASX: SYD)
Sydney Airport is one of the best defensive stocks on the market and provides investors with a reliable and growing income stream. It has been one of the best performing stocks over the past five years and the robust outlook for domestic and international tourism means Sydney Airport should remain a strong performer for many years to come.
Financials:
Australia and New Zealand Banking Group (ASX: ANZ)
With a fully franked dividend yield of 6.5% and a price-to-earnings ratio of less than 11, it's hard to go past the ANZ as the best of the big four banks in regards to value. Although slower economic growth is going to impact earnings growth in the short term, the bank looks undervalued at current prices.
Retail/Consumer Discretionary:
Retail Food Group (ASX: RFG)
Retail Food Group delivered a record result in FY15 and is likely to beat this record by 20% in FY16. The stock has been sold off heavily but now appears like pretty good value with investors now offered a dividend yield of more than 5.5%.
Technology:
REA Group Limited (ASX: REA)
REA Group delivered a strong FY15 result and strengthened its position as the dominant property listing provider in Australia. Although the shares trade at a premium to the broader market, the company has a number of strategic growth options that should see earnings continue to grow above the market average for many years to come.
Telecommunications:
M2 Group Ltd (ASX: MTU)
M2 has been a star performer for many years but the company still has a lot to offer. Management is guiding for revenue growth of around 25% and NPAT growth of between 30%-35% in FY16. The recent fall in the share price means the company is now attractively priced and investors will also receive a dividend yield of at least 4%.
Consumer Staples:
Woolworths Limited (ASX: WOW)
Although not without its risks, Woolworths remains my preferred investment in the consumer staples sector. The company faces a couple of difficult years ahead but at the current share price, this appears to be mostly priced in. The company still pays a strong dividend and has potential as a rewarding turnaround stock.
Healthcare:
Greencross Limited (ASX: GXL)
There are a number of high quality stocks in this sector but I think Greencross has one of the best growth profiles that will reward patient shareholders over the next few years. The demand for animal care is increasing and Greencross is well placed to take advantage of this.
Energy/ Materials:
BHP Billiton Limited (ASX: BHP)
Energy and materials would be my least preferred sector at the moment but if I had to chose one stock in the sector it would have to be BHP. It has operations across a number of commodities and is often the lowest cost producer. Any turnaround in commodity prices will see BHP's share price bounce back strongly.
Property:
BWP Trust (ASX: BWP)
BWP Trust has been one of the best performing property stocks over the last 10 years with above average capital growth and consistently increasing dividends. Its portfolio is geographically diverse and with Bunnings Warehouse as its major tenant, generates defensive and reliable earnings.
International:
Market Vectors MSCI World Ex Australia Quality ETF (ASX: QUAL)
An ETF is the easiest way to get broad exposure to international equities in a cost effective manner. The above ETF is made up of some of the most well-known international companies including Google, Apple, Microsoft and Starbucks.
