ABCs of Investing - Diversification

Diversification: spreading your investments over a variety of assets and securities to avoid over-exposure to any single source of risk.

2 ways to diversify:
  • Invest in different asset classes like cash, bonds and shares;
  • Invest in different securities in an asset class.


Mistakes

  1. The most common mistake is not diversifying your assets in the first place.
    No matter what stage of your investment horizon you are in, some degree of asset allocation is advisable. Strategise for the appropriate mix of equities, bonds and cash on deposit to suit your needs.

    Remember the rule of 100 minus your age as a guide. If you are 30 years old, 70 per cent of your assets can afford to be in equities. If you are 60, that number should be nearer 40 per cent. 

  2. Not diversifying within asset classes. A tailored spread of equities, bonds and cash in deposit should be a strategy. Diversifying within these assets is also important.

    Remember, investing in assets with a negative correlation is the way to go. That means picking investments which don't react in the same way as economic conditions change. Too many investments that move together in the same direction are a risk to your portfolio. Doing this will spread your risk, so you can weather the storm of economic crises that will inevitably come.

  3. Not diversifying internationally.
    Emerging markets in Asia are an exciting pick when choosing your portfolio, but they don't come without risk. Putting a portion of your funds into the more developed markets of Europe and North America can help to broaden investment choices and protect you from volatility. An international perspective also increases the scope of industries available to you as well as the markets that they compete in.

  4. Thinking you can handle all this diversification on your own.
    A keen interest and knowledge in the investment arena will certainly help, but if you are so tied up that you can't devote enough resources to diversifying your portfolio or you simply don't have the expertise. Get some help.

Questions to Ask

  1. Are my investments diversified? They will need to be to lessen your risk. The time horizon of your investment goal will help determine how.

  2. Am I diversifying within asset classes?
    Look at each asset class and diversify further still. Exactly how, is a personal choice but look towards getting a good spread of industry sectors.

  3. Am I diversifying internationally? By not doing so, you are stacking all your eggs in Singapore's basket. Remember, there are emerging and established markets elsewhere that could help spread your risk. 

  4. Do I need help? It is likely that your expertise will be in one area be it an industrial sector, or a region of the world. But don't limit your investments to the knowledge you have. Think about getting help from the experts, not only on what to invest in but how to get access to the different vehicles available.

  5. When should I have an investment plan? How often should I change it? Milestones in your life are a good time to relook your needs.

  6. How liquid is my portfolio? While the idea is to be invested for the long term, it's also good to know how easily you can cash out.

  7. What is my risk profile? Do I want to sleep well now or eat well later?