However, “diversified” doesn’t simply mean a resources stock like BHP Group Ltd (ASX: BHP) just for the sake of it. This can lead to “di-worsification”, meaning that you’ve added shares to your portfolio but worsened your returns.
Good diversification means owning shares that are mostly uncorrelated to each other but still offer good potential returns.
The Rask Finance video below explains diversification:
I think the below five stocks fit the bill of a diversified portfolio:
MFF Capital Investments Ltd (ASX: MFF)
MFF Capital may be the best listed investment company (LIC) on the ASX. Led by Magellan Financial Group Ltd (ASX: MFG) co-founder Chris Mackay, MFF Capital has been the top performer over the last decade as it concentrated on large global winners like MasterCard and Visa, both of which which have excellent network effects.
It has one of the lowest management fees (as a percentage) in the LIC sector, which helps keep the net returns higher.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)
WHSP is an investment house business which has been operating for over 100 years. WHSP takes long-term investment positions in businesses that could be profit growers for years to come.
WHSP has consistently outperformed the benchmark, it has been paying a steadily growing dividend for almost two decades and it has a low risk balance sheet in terms of its liabilities.
It could be one of the last shares standing on the ASX in the decades to come.
Vitalharvest Freehold REIT (ASX: VTH)
Vitalharvest is the only REIT to make it onto my list. I think many of the others have gotten too expensive compared to their asset value and the yield is too low.
Vitalharvest owns farmland that is based on healthy nutritious food, of which there is a growing demand for. The REIT earns a 8% base rent on its farm value (plus on capital improvements) and also receives 25% of the underlying earnings from the farm.
Over the past 12 months, Vitalharvest has paid distributions amounting to a current yield of 6.6%.
Webjet Limited (ASX: WEB)
The leading online travel business has seen its share price fall since the middle of the year despite revealing further profit growth and profit margin growth, which helps profit grow faster than revenue.
If Webjet achieves the expected growth over the next couple of years, it could be valued as low as 13 times the estimated earnings for the 2021 financial year.
Altium Limited (ASX: ALU)
Altium is one of the world’s leading electronic printed circuit board (PCB) software businesses. PCBs are essential for engineers to design future phones, computers, cars, tractors, spacecraft, robots and so on.
A high growth rate, big goals and low interest rates have driven the Altium share price to new heights, but I think it looks better value compared to other tech shares like WiseTech Global Ltd (ASX: WTC).
If Altium achieves its aspirational revenue target of US$500 million by 2025, then today’s price could seem fairly cheap.
I think each of these shares could be very good for long-term returns. For the more conservative minded, I think WHSP and Vitalharvest could be good investments for five plus years, but Webjet could be very good value for the thrill seekers and could produce the biggest returns.
Disclosure: Jaz owns shares of MFF Capital Investments, Washington H. Soul Pattinson and Co., Vitalharvest Freehold and Altium at the time of writing, but this could change at any time.