Diversifying a stock portfolio doesn’t have to be overly complicated, and needn’t involve buying complex investment funds that inevitably come with high fees. In fact, I think it’s perfectly possible to achieve a good degree of diversification by investing in just a handful of FTSE 100 mega-cap stocks.
For best results, I’d pick the best stock from each sector of the FTSE 100, or rather from the sectors that are poised to do well. Picking the best stocks from the best sectors is effectively a form of selective diversification.
Despite the Brexit gloom, we investors shouldn’t forget that the UK is home to some of the world’s biggest and best companies.
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Mega caps
These mega caps tend to have a few things in common. They are hugely profitable billion-pound companies with a track record of producing predictable and reliable financial results. Their sales are split across the world, with the majority originating from outside of the UK.
Crucially, they are big dividend payers and have demonstrated an ability and willingness to grow dividends over time. Importantly, they all have brand strength that protects revenues from competitors and economic downturns.
From the insurance sector, I’d pick Prudential for its exposure to emerging markets. It’s the largest pan-Asian insurer and has a strong presence in the huge US market. Over in the consumer goods sector, Diageo is similarly well diversified from a geographical viewpoint, and has some serious brand strength too.
I’d choose International Airlines Group from the travel sector. As well as being attractively priced, the group also offers diversification, and looks set to benefit from the expected continued growth in air travel.
While AstraZeneca shares are by no means cheap, they would be my top pick from the pharmaceutical sector. The pharma giant has a strong drugs pipeline, with a growing oncology business.
Experian would be my top stock from the technology and information services sector. The information and analytics provider operates in a growing market, and is well exposed to the huge US market.
Despite being more UK-focussed than my other picks, Lloyds is my favourite of the large banks, with a net interest margin and cost to income ratio that compares favourably to any of its competitors. Now the August PPI deadline has passed, I think financial performance can only improve.
In the energy sector, I’d go with Shell, for its impressive cost control and focus on cash generation. JD Sports – from the retail sector – would be my final pick. As well its track record of growing profits, a recent US acquisition now gives it both scale and geographic diversification.
Market outperformance
Since the start of the year, this portfolio would have risen in value by 22%, comfortably beating the FTSE 100’s gain of 9%.
What’s more, this portfolio contains some huge dividend payers and has an average yield of nearly 4%. I think this is just another reason why this could be a good all-weather stock portfolio to survive Brexit and beat the market in the long run.
