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Portfolio Diversification

How do you diversify your portfolio ?

Royalchem

23 Feb 2021

Project Officer at Security Related

Diversifying is the most common term when it comes to investing and building a portfolio. The wealth advisor on the street will always tell you to diversify, diversify and diversify.However, majority of the time, they cannot tell you how.... They tend to sell you some form of product that is suppose to diversify your portfolio but at the end of the day, you may end up with just a higher percentage of stock holding.

Example

Xiao Ming has a stock portfolio consisting of DBS, CapitaLand and SembCorp. Then his colleague introduced him to a chiobu wealth advisor which sell product such as fund. The chiobu advisor told Xiao Ming that this fund is a well diversify fund which invested in various blue chips like banks in Singapore and around the region. She told Xiao Ming that the return will be a steady dividend of 3 % which Xiao Ming happily accepted. Xiao Ming then learnt about ETF from another colleague and started to DCA on STI ETF.

If you noticed it, Xiao Ming's portfolio looks like he has many different product and very well diversify but actually his portfolio has a very strong correlation. His portfolio will likely take a hit once the stock market falls or even if DBS falls. This is because both the fund and ETF will likely consist of blue chips such DBS.

So how to diversify ?

As much as possible, there should be as little to no correlation among the products as possible. Example if the share price of DBS take a hit, ideally the other products should have as little impact as possible. However, some people may comment and say that once the stock market crash, everything will crash.. No doubt, there is some form of truth to it but so long your portfolio is diversify, there will be some form of cushion for you.

So if I should not all in stock, what else can I buy if I also cannot buy fund...The answer is that you can buy fund but it should not consist of the stock that you are holding. Example if you want to buy only stocks listed in the SGX then you should consider other product that don't have SGX listed stocks. So you can consider maybe fund and ETF that target US, Europe or HongKong. If you believed in Cryptocurrency, then you might even want to consider Bitcoin. There are also products like bonds or P2P lending.

Conclusion

I don't have the perfect ratio for diversification but Having no diversification is better than anyhow diversify.

Comments

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ABOUT ME

Royalchem

23 Feb 2021

Project Officer at Security Related

A farmer who wished to retire from farming to pursue dream

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