Earnings reliability in this environment is very tricky with the coronavirus.
Interest rates are so low it has made the earnings/interest certainty of bonds look very expensive. Would you rather invest in Vanguard Australian Government Bond Index ETF (ASX: VGB) for a tiny return or go for shares?
I’d rather go for shares. But share prices are always going to be volatile, however earnings from some shares could be much more stable. But how much should investors pay for those earnings to be mostly stable?
Some defensive shares like APA Group (ASX: APA) and Ausnet Services Ltd (ASX: AST) offer potentially reliable earnings. But they’re priced highly for that safety.
Shares like EML Payments Ltd (ASX: EML) and Pushpay Holdings Ltd (ASX: PPH) have the potential to generate strong returns over the future. But there are a broader range of potential outcomes for those riskier shares.
But it’s up to you decide how much risk you’re willing to take with your investing. Can you stomach earnings volatility, or perhaps earnings unpredictability? Getting the best results in investing will require taking on more risk.
Is there a way to reduce risk and still get good returns?
It’s okay if you don’t like taking on as much risk. Diversification can help reduce the risk of an individual holding. It’s why investments like Vanguard Australian Shares Index ETF (ASX: VAS) are so popular. It takes out some of the guesswork so that it becomes more about your mindset to hold through tough periods.
Obviously if you end up owning more than 30 individual shares yourself then you’re probably losing the advantage of investing in shares with your own portfolio. Is that smallest holding as good as your tenth (or better) idea? It might be a good idea to just focus on your best ideas.
You can also help your returns by going for shares that pay a good dividend, which will help smooth out your gains.
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More reading
- Why Fortescue, Freedom Foods, Pushpay, & QBE shares are dropping lower
- Where to invest $10,000 into ASX shares immediately
- Got $2,500? I’d buy these 2 ASX shares in a heartbeat
- High yield dividend shares could be the answer for income
- The smartest shares to buy if you have $2,000
Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Emerchants Limited. The Motley Fool Australia owns shares of and has recommended PUSHPAY FPO NZX. The Motley Fool Australia owns shares of APA Group. The Motley Fool Australia has recommended Emerchants Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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