Investments

Asked by Anonymous

Updated 3w ago

I constantly hear about the importance of diversifying your portfolio when it comes to investment. What would be considered a diversified portfolio?

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Kishor Bhagwat
Kishor Bhagwat,
Level 4. Prodigy
Answered on 23 Mar 2019

1.Have you heard the term "dont put all your eggs in one basket"? The principle is the same. However, in finance, there is a lot more measuring and estimating, so there are mathematical formulas to help with diversification.

  1. Basically, your investments are subject to different economic influences - rising inflation, slowing growth, unemployment etc etc. Your returns are a function of these economic influences - if you own oil stocks, they will do well when price of oil rises for eg.

3) By diversifying, you basically build a portfolio that will have components which do well in different economic situations, so that in any one economic scenario, you dont lose all your money.

4) In general, the basic assumption is that over time, due to capitalism, the returns will drift upwards, and you will get returns over the long term because you diversified, and did not suffer large losses on the way!

5) Your choices in building a diversified portfolio are too many. Your home, your CPF, jewellery, fixed deposits, equity, different types of bonds, art, bitcoin, luxury watches - anything of value can be considered as part of diversification. You can diversify within equity/bonds/property/commodities - using sectors, countries/regions, growth/value , maturities, credit ratings etc. Many options! Read a baasic book on Asset Allocation and you'll get the idea.

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My opinion of diversification is in line with Kishor (his investment knowledge has upped quite a lot in the span of time we met in December, props to you).

Diversification is a lot to deal with being in different sector, country, region and industry. For e.g, energy sector, versus logistics, f&b, property, FMCG (fast moving consumer goods), or even electronics, and even gold.

Or, Emerging markets, US markets, China.

There are competition from everywhere. Even being in the same sector. Individual stocks have different performance. Hence why you are encouraged to invest in index funds.

The one thing about diversification, is that it will lower potential returns, trading a margin of safety. Hence its a balanced approach to let's say, all in for oil and gas (you would have suffer high losses if you bought in 2015).

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Kishor Bhagwat
Kishor Bhagwat

23 Mar 2019

Haha - i was a newbie at CPF when we met - still know less than you! Just started answering on investments after i had some real investing experience under my belt. on the question of returns - there are two ways to look at it: 1. your approach has better/lower nominal return compared to something else 2. Your approach has better risk adjusted return. Or same return at lower risk. So it depends on the objective.
Luzon Visayas Mindanao
Luzon Visayas Mindanao,
Level 1. Freshie
Updated on 25 Mar 2019

After your Birthright is given, The Bank might ask you permission of Investing you Birthright for International Financial Security. When the Aggreement is settle, the portfolio still The Golden Ratio, Golden Ratio based on the system gave you the Birthright... Meaning to say, Investing your money in the bank in full amount obliges the banks of paying 36.5 from that full amount/or value per year. (Ginansiya nimo)

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Zann Chua
Zann Chua,
Level 6. Master
Answered on 22 Mar 2019

Hello!

A diversified portfolio would be a portfolio that consists of various investment product that has different risk levels and yields, which seeks to lower the assumed risk and leverage a significant percentage of the variability of the portfolio performance.

It typically means investing in various assest classes and risk levels in order to mitigate the overall investment risk.

I think a portfolio is likely to be considered diversified when there are various investment categories in your portfolio and there is a range of risks of these investments.

While it is important to diversify your portfolio, it is also important to remember to not overdiversify your portfolio!

hope this helps!

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Good Samaritan
Good Samaritan,
Level 2. Rookie
Answered on 22 Mar 2019

A very good question!

Most investors have diversified portfolio. Why?

Putting your money into different portfolio like bonds, equity, stocks, Forex, etc. reducing the risk of losing all of your total investment.

For example, you invest only at stock market. If that stock market crashed, all of your invested money is gone. However, if you have another investments like bonds and Forex or like investment-linked insurance policies, potentially you can get back of what you lost in the stocks. That's why diversified portfolio is good!!

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You are invested in various geographies, sectors, and asset classes.

The point of diversification is to make sure you can weather financial storms and aren't hit by big losses that can derail your entire portfolio.

Remember that a 50% drop requires a 100% return to break even.

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