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Quality shares: balance valuation and cyclical risk

Expensive shares may have good prospects but diversify style risk
Quality shares: balance valuation and cyclical risk
  • Three main market companies pass all nine quality tests
  • On Aim ten stocks get full marks

Investing in the shares of quality companies with strong balance sheets and robust profitability is a well attested-to method of building returns. Yet there are pitfalls, notably that these companies become so popular that the shares get very expensive, and this valuation risk means they are vulnerable to price falls on macro economic news or even the slightest disappointment in performance.  So, along with quality, there needs to be some focus on value - even if some of the best companies remain worth paying up for. 

Diversifying portfolio strategy so that not all shares held are priced expensively relative to expectations of future profits is sensible. However, it is also worth keeping in mind that companies in different sectors of the economy should not be valued the same way. 

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