I’ve never been a cautious investor. I like hitting sixes – and that’s why I’ve always liked investing in small cap and penny stocks. But I like to hedge the risks of these stocks to ensure I don’t blow up my portfolio. In the past I’ve told you a good way to do this is to allocate a portion of your portfolio to ETFs for their stable returns, while you use the discretionary portion of your portfolio for the high risk/high reward opportunities.

And today I’d like to show you why ETFs present a better option than picking so called ‘SAFE’ stocks from the JSE’s Top 40.

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Are these market darlings ‘SAFE STOCKS’?

A decade ago British American Tobacco was seen as the ultimate ‘SAFETY’ stock. It was a market behemoth. Demand for cigarettes was huge. And the company was chugging out dividends year after year. It was in nearly every single balanced portfolio.

In the ten years since – the share price is down 1%. Including dividends – the stock has returned 78% over the past ten years. Barely keeping up with inflation.

Similarly – Vodacom (or almost any stock in the Telecoms space) was seen as a MUST HAVE portfolio holding. The biggest cell phone network in SA. Low debt, big dividends and consistent cashflows was what attracted investors to the share back then…

And between 2014 and 2017 the stock price was up 56%, with returns including dividends at 90%. But today, ten years later the share price is 20% down, and the total return including dividends is merely 40%.

The last example – is Woolworths… The retailer was seen as a massive opportunity a decade ago. Woolies Food was taking off big time, and the company was raking in profits. Its financial services arm was growing at double digit annual figures, its Australian business was growing… All in all it looked like a solid company.

Today, ten years later the stock is up 10%, and returns including dividends sit at 55%.

Less risk could have rewarded you with bigger returns

Picking three ‘stalwart’ stocks like British American Tobacco, Vodacom and Woolworths back in 2014 definitely wouldn’t have sounded like a risky choice.

But the thing is – individual shares hold risk, no matter how big or sound their business models.

And here’s the thing:

Had you bought the Satrix 40 ETF you would have seen growth of 56% in the value of the ETF, and including dividends your return would sit at 110%.

This would have comfortably beaten all three shares I named above.

And the amazing bit is – the Satrix 40 ETF portfolio would’ve included these individual stocks in smaller percentages. But because it holds all the Top 40 stocks – it averages out returns.

This reduces your risk of any one stock tanking – and ensures you get market related performance.

If 70% of your portfolio gets this ‘average’ market performance, you can risk the remainder on riskier stocks – with the goal of getting much higher returns. If you get them wrong – your performance will still be ok, thanks to the safer portion of your portfolio.

If you get them right – you will solidly beat most fund managers and ‘safe stocks’ at their own game!

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