Diversification. The word you would have come across when you first started investing. But, what does it really mean, and more importantly, are we doing it right? I’m currently reading Intelligent Investor (After 3 years of investing.. A little late, I know haha!) and I must say, I have been renewed in my mindset in a lot of ways and on many different matters. I’m only like 20% done with the book but I’ve picked up many valuable principles and perspectives that I’ve never considered before.
Why I’m writing this post is because I felt that many of us although have heard about diversification, we might have been doing wrong. Is diversification just buying a bunch of stocks or the STI ETF? If the point of diversification is to protect an investor from extreme fluctuations or even a market crash, then something is wrong. Most people I know who say they are diversified, are diversified in different industries of SGX. Yes, it is diversified, but is it enough? Where did bonds go? Where did overseas exposure go to?
As I was reading The Intelligent Investor, I immediately felt ashamed about my mindset towards investing, investment horizon, and my approach towards my investments. I was reading a lot of things that I have learnt in the past but ignored them because they seemed so rudimentary. Just on diversification alone, I ask myself, am I even diversified? If SGX fails on me, what else do I have? Nothing.
On the positive side, right now I am holding about 55% in cash. This means I have room to deploy my warchest without having to let go of my current shareholdings. Having a passive income of $1k/yr right now is very useful to me as it gives me a buffer to cushion on and prevents me from acting rashly because my mindset would veer towards ‘No trade = No income’. However, I contemplate on whether receiving my passive income via stock market alone is a good idea or not.
I was contemplating on bonds, but I realised it might actually be a terrible time to be in bonds. As we learn in Finance, bond prices have an inverse relationship with interest rates. At the going interest rates, there is only one way left to go, which is up. (Eventually..) This means that bond prices will fall to make existing bonds attractive while newer issues of bonds would give out a higher coupon rate. I think the trick now lies in spotting when interest rates are at its peak. I wonder if I’d ever get a bond at say.. 6-7%? (Worst economic case scenario). From there, when interest rates does go back down, bond prices will rise, giving me both the benefits of a high yield and capital appreciation.
Pretty muddled right now as to what actions to take, but one take away I got away from the book in such situation was this:
- No borrowing to buy or hold securities.
- No increase in the proportion of funds held in common stocks.
- A reduction in common-stock holdings where needed to bring it down to a maximum of 50 per cent of the total portfolio. The capital gains be invested in first-quality bonds or held as a savings deposit.
Reviewing, I think my current strategy clears the checklist, so that’s good.. Right now I’m just sitting on cash while learning and monitoring existing positions. I’m just keeping watch of companies that are sliding on a downtrend now and awaiting for the time to make my move! With all the volatility going on, what’s your strategy? 🙂
Also! I attended the recently concluded World Value Fest 2015 with Mary Buffett as the keynote speaker! I penned down the lessons I learnt and you can read all about it here! More lessons from the other speakers will be posted at a later date as well. 🙂