Diversification

[Rontan]

Has anyone who is practicing diversification achieved better returns because of that? Appreciate your kind sharing...

I use diversification primarily to protect the downside risk. While prices of some stocks may fall below purchase price, others may have risen way above purchase price. In such a situation, I can choose to take money off from the winners while giving the losers a chance to come back. I can redeploy the money earned to invest in other companies and thereby maintain a diversified portfolio.

This is of course a simplistic view but I think you get my idea.

You heard the saying: If you take care of the downside, the upside will take care of itself. So I think good returns is a consequence of diversification.

[ghchua]

I am just wondering - if one is overly diversified - eg. >30-50 stocks and assuming each stock is <5% of total portfolio - i agree that there will be cases of multi-baggers but there may also be unfortunate cases of complete bankruptcy of individual companies. Unless assuming one is top-notched in their stock-pickings and able to time purchases well during downcycles, if not, isnt it better to buy ETF as a form of diversification? (with remarkable reduction in brokerage fees - ie. one purchase of ETF vs 30 or more purchase of equities).

It depends on what you want. Currently I can't find an ETF which invests in S'pore which covers the whole market. Therefore, ETF is not a solution if there is no liquidity in the underlying stocks that you are interested in. Let's say I am interested in S'pore mid-cap value stocks, there is no ETF for that.

Also, you have no control over rights issue when buying an ETF. You cannot apply for excess rights shares.

[ghchua]

I am collecting a lot of ideas here. No doubt diversification is a tool for reducing risk, how about improving returns?? Has anyone who is practicing diversification achieved better returns because of that? Appreciate your kind sharing...

(I am still writing my thesis)

Hi cif5000,

Diversification is not about achieving better return. It is about protecting your non-systematic risk so that one can consistently invest into the market and practice time diversification as well.

Diversification will not protect you from systematic risk like financial crisis. But with emotions out of the window, one will be consistently investing back into the market whether it is crisis or not. And with this disciplined approach, one will be able to ride out any crisis and come out better by staying invested in the market.

[ghchua]

I use diversification primarily to protect the downside risk. While prices of some stocks may fall below purchase price, others may have risen way above purchase price. In such a situation, I can choose to take money off from the winners while giving the losers a chance to come back. I can redeploy the money earned to invest in other companies and thereby maintain a diversified portfolio.

This is of course a simplistic view but I think you get my idea.

You heard the saying: If you take care of the downside, the upside will take care of itself. So I think good returns is a consequence of diversification.

Hi Rontan,

You can choose to let the winners run and re-invest your dividends collected back into your diversified portfolio. In this way, there is no need to sell your winners but you don't add onto your winners so that your allocation to them will be reduced automatically by re-investing the dividends back into other stocks in your portfolio.

Purchase price should never be a criteria to determine when and what to sell. Rather, it is your investment plan.

[Rontan]

You can choose to let the winners run and re-invest your dividends collected back into your diversified portfolio. In this way, there is no need to sell your winners but you don't add onto your winners so that your allocation to them will be reduced automatically by re-investing the dividends back into other stocks in your portfolio.

Thanks for the advice. I understand what you are saying and it makes sense. Actually, that is what I hope to achieve in the long run, having a sizable portfolio of diversified stocks that will ride out the ups and downs of business cycles. By then, I just need to think of where to reinvest the dividends that are generated from the portfolio. However, my current portfolio size is really small, and the dividends are not material. So I guess I will need a combination of capital gains + dividends yield to boost my overall portfolio size.

[kennynah]

Currently I can't find an ETF which invests in S'pore which covers the whole market. Therefore, ETF is not a solution if there is no liquidity in the underlying stocks that you are interested in. Let's say I am interested in S'pore mid-cap value stocks, there is no ETF for that.

Also, you have no control over rights issue when buying an ETF. You cannot apply for excess rights shares.

indeed that our financial services are not as matured as we want it to be...

ETF funds do not issue "rights"....

[winston]

Actually, that is what I hope to achieve in the long run, having a sizable portfolio of diversified stocks that will ride out the ups and downs of business cycles.

I discussed this before. I had a friend who had a very big global portfolio. In it, he has the bluest of blue chips. He had leaders of various industries. His stocks were listed on a few continents.

So what happened when the financial tsunami hit ? His diversified global portfolio was hit as well. When I talked to him, he was down several hundred thousand. And that was just at the beginning of the crisis...

So having a sizable portfolio of diversified stocks, will still not allow you to ride out the ups and downs of business cycles. The only thing is to be in Cash or to short the market...

[Aspellian]

Actually, that is what I hope to achieve in the long run, having a sizable portfolio of diversified stocks that will ride out the ups and downs of business cycles.

I discussed this before. I had a friend who had a very big global portfolio. In it, he has the bluest of blue chips. He had leaders of various industries. His stocks were listed on a few continents.

So what happened when the financial tsunami hit ? His diversified global portfolio was hit as well. When I talked to him, he was down several hundred thousand. And that was just at the beginning of the crisis...

So having a sizable portfolio of diversified stocks, will still not allow you to ride out the ups and downs of business cycles. The only thing is to be in Cash or to short the market...

prob the idea presented by ghchua is riding both the ups and downs (even if paper loss), and hoping to diversify away non-systematic risks hoping that not too many of the companies go belly-up during a down cycle. whereby when the cycle is back again, the portfolio will be back to original value. its prob a looong term idea that stock prices will always go up, dividends will be collected and reinvested = prob at the end of one's investment journey, whatever amount you invested in has a return on capital that is satisfactory and beat the inflation.

but what if an economy is like Japan and it is still struggling to get back to its past glory? how do one diversify away from this country risk? assuming one has a limited time horizon of only 20-30 years because of real necessity needs in later years?

[Musicwhiz]

So having a sizable portfolio of diversified stocks, will still not allow you to ride out the ups and downs of business cycles. The only thing is to be in Cash or to short the market...

That's assuming you have close to impeccable timing.

Otherwise, I still think it's better to buy and hold a diversified portfolio, or an ETF. Yes it may go down during crises but when economy recovers it will recover along with it (as we are witnessing now in share prices and valuations).

[winston]

1) That's assuming you have close to impeccable timing.
2) Otherwise, I still think it's better to buy and hold a diversified portfolio, or an ETF. Yes it may go down during crises but when economy recovers it will recover along with it (as we are witnessing now in share prices and valuations).

1) Agree, Timing is everything

2) The Japanese market is a good example. After 20 years, it's still 1/3 of where it was.