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

Posted on 22 Mar 2019

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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7 answers

Discussion (7)

Kishor Bhagwat

Kishor Bhagwat

Level 7. Genius

Posted 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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Post

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.

Post

Frankie Rappaport

Frankie Rappaport

Level 16. Sage

Posted on 08 Mar 2020

From a pragmatic viewpoint

every passive indexing ETF is wunderfully diversified,

and yes, diversf...

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