If history is any guide, there is a very high probability that the stock market and the economy will eventually recover from the current global crisis though neither will be the same as before. While the equity markets are already up approximately 35% from the March lows, it is very important, and a great opportunity, for investors to re-evaluate their portfolios to make sure they are positioned in the best way to ride out these volatile times and be poised to take advantage of the opportunities that are out there.
While the investment strategy of owning only high-quality stocks does not always result in the highest returns, it clearly is working well in the economy’s current climate. Quality company shares have been performing much better than broad benchmarks, particularly during the past few months.
The traits that make up “quality” stocks include a well-established business that is not solely reliant on a strong economy, a very wide moat against competitors, strong return on equity, high free cash flow, profitability, and a fortress-like balance sheet. There are a number of mutual funds and exchange-traded funds that have been created to make it easier for investors to invest quality companies.
A strategy of investing in quality companies is certainly not new. The current crisis has proved a great reminder and proof positive that in trying market environments, quality proves it worth many times over. There is an overlap in many cases of quality companies residing in classically defensive sectors. Healthcare is a good example of this and while you do not want to have your entire portfolio in one sector, industry or type of stock, quality companies are something that should be in every investors portfolio.
While the health, strength and future of the global economy has been the subject of much debate, investors have a critical need to invest in stocks to meet long term financial goals and are rightly drawn to steady, stable quality companies. These types of companies have weathered numerous storms in their history and in many cases, emerged stronger.
Given the nature and uncertainty of the current COVID-19 crisis, it will remain very important that investors have a quality bias to their portfolio. We have witnessed some of the most volatile times in the equity markets history. While that volatility has moderated somewhat over the past few weeks, we most likely have not seen the end of it. Quality stocks provide a very nice ballast and an opportunity in turbulent times.
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