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Balance is the key to everything. Wealth, health, and happiness. But most of us have a weakness - the promise of greater returns, a more lavish lifestyle or another type of fulfilment. But by applying balance, we can achieve stable outcomes. In the realm of investments, 2012 is shaping up as a great year to establish a platform on which to build your future.
The Dow has moved to a new trading range and the ASX 200 appears to have positioned itself with a new floor above 4,200 and may be poised for a sustained long-term move upwards, albeit trailing our offshore counterparts. It seems that the relative risk to the downside is much lower than at any time throughout 2011. Clear support has filled the index in the first quarter of 2012 and large-scale volume has begun to make its way back into what has been a rather anaemic market.
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In times of consolidation, a balanced approach to a portfolio is more important than ever. Just about every major ASX stock looks cheap on long-term comparisons and despite the large potential gains of the small caps and low liquidity growth stocks, now may be the time to add ‘sensible’ stocks to your portfolio. A healthy portfolio of ‘sensibles’ may sound boring, but this strategy may just be the ticket to developing an outstanding diversified portfolio for the long-term.
In these tough times, poor stock selection could be costly. Very costly. Let’s consider some fundamentals:
Diversification:
Diversification is paramount. Healthcare, banks, mining, staples. All of these sectors contain some of Australia’s most consistent and profitable companies. And all are available at a heavy discount to historical levels. BHP, WOW, CSL, WBC all scream long-term value, are comprised of the best management in the country and should be a part of any healthy portfolio.
Diversification is essential to your portfolio’s diet. If you only eat chocolate and fried food, happiness and prosperity are not likely outcomes. Diversification is the first step to achieving balance. In recent times, losses in the materials sector should have been offset by gains in the Healthcare or Industrial sectors. And the banks - despite global issues and costs of funding - are priced at a near worst-case-scenario levels in what is actually a conservatively managed, high-profit environment.
Price/Earnings Ratios:
P/E Ratios are an excellent measure of any stock, are used by analysts as an industry standard but are often ignored by every-day investors. While it isn’t essential to know exactly how a P/E Ratio is calculated, it is important to have an understanding of what a good P/E means. The general rule is the lower the PE, the better. Historically strong stocks - in particular Australia’s banks - are operating at just half the P/E multiple of pre-GFC conditions and represent undeniable value.
Balance is boring:
Sometimes we need to be boring to achieve the best outcome. Right now, markets are showing a new platform of stability and growth potential. Add some solidarity to your portfolio and take advantage of the abundance of ‘sensible’ buying opportunities in what is likely to be a turning point for Australian markets.
Stay Ahead of The Game,
Lachlan McPherson
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