“Never place all your eggs in a single basket” is probably one of the most commonly used and thrown-about phrases in various financial commentaries and articles. Nonetheless, although the investment realm has vastly expanded over the years, the advice still holdstrue and is applicable even till today.

 

Investment is a marathon, not a sprint

Each and every one of us may have our respective short- term goals that we’d like to attain, but the bigger picture for which we invest – in all frankness – is essentially for the consistent growth and preservation of wealth.

Imagine the investment journey as a 30km marathon – each kilometre represents a metaphorical year and the finish line represents your financial end-goal. Sprinting right from the start would only leave you out of breath before you even reach the halfway mark; and chances are you may even drop out from the run. So how does one get through a long marathon? The answer is simple – you got to balance your pace.

Balance is the key word here. To reach your financial end-goal, you’ll have to weather through more than a few ups and downs in the market. Thus, building a well-balanced and diversified portfolio would be the more optimal approach, as opposed to being overly hung-up on short-term noises which could potentially lead to rash investment decisions.

In some ways, a diversified strategy keeps you on track towards your goal; sort of like a blueprint if we may. At times when our emotions get the better of us, go back to your blueprint. Check if the decision may tilt your holdings to be bias on a certain asset. If it does, rebalance it! Your strategy serves as a reminder - to not lose sight of the critical long-term goal!

 

Diversification as a Protection Tool

As aforementioned, the investment journey is a marathon – long and tedious. Although markets can be fairly favourable at times, any skilled investor would know that the tides may turn without so much as a hint.

Of course, few may have succeeded in handpicking the “fastest horse” at times, but to get it right 100% of the time is virtually impossible even for the best. Hence, a sound investment strategy lies not in predicting markets, but rather diversifying your investment holdings to weather through diferent market cycles.

Diversification can be an effective protection tool if applied correctly. For instance, different assets may have varying reactions to changing market conditions. It is not uncommon for winners from a particular year to become underperformers in the next, and vice versa. Thus by diversifying your investments, you are more likely to soften any impact on the downside, and potentially opening doors to cyclical gains.

 

Getting to the Starting Line

Unit trust products have long been in the conversation when it comes to diversification – a much favoured option given its low initial investment amount required, and its ability to grant easy access into varying asset classes, sectors, geographies and even currencies.

Exchange-traded fund (“ETF”) is also becoming an increasingly popular choice when it comes to diversification. To put it simply, ETF is an investment vehicle that tracks the performance of a particular index or even a pool of assets – think mutual fund but with the flexibility to trade as a stock.

ETF stands out as a versatile investment tool that can be adapted to suit varying portfolios and objectives. ETFs that ofer exposure into broad market indices such as the S&P 500 and MSCI Asia (ex Japan) are pretty common – easily adding the element of diversification into one’s portfolio.

Although ETF is still a relatively new concept to Malaysian investors, its low expense ratio and easy access through the stock exchange makes it an attractive option!

 

ETF Fun Facts!

  1. The global ETF industry stands at 3.9 trillion USD in assets as at 1Q2017 – that’s roughly USD847 billion more than the global hedge fund industry!*
  2. Did you know that there are highly specialised ETFs which can be used to complement your portfolio? For example:
    • Commodity ETFs (Gold, Silver, Crude oil, etc.);
    • Small-cap ETFs;
    • Fixed Income ETFs and more.

* Figures based on ETFGI & HFR data, as at March 2017.

 

The Bottom Line

As global macro and events continue to ofer no shortage of uncertainty, we firmly believe that diversification would be a well-justified approach to navigate the markets ahead.

However, do be wary that just by covering a lot of markets doesn’t mean that you will be fully protected from any downsides. There is still a need to: (1) thoroughly understand the assets that you plan to invest in; and (2) plan your allocation based on your own financial objective and risk appetite. For instance, an investor that is nearing retirement would prioritise wealth preservation over growth – hence would have a portfolio that is inclined towards fixed income or money market instruments as opposed to stocks.

A diversified approach doesn’t necessarily have to be the game plan for your entire portfolio. One may still be selective and make tweaks to their investment holdings based on prevailing market conditions.

All in all, regardless of your experience as an investor, it is always important to keep an open mind and remain composed at all times. And similar to how a marathon runner can benefit from a good coach, your long-term investment performance may be enhanced with the companionship of a right financial advisor or partner. Happy diversifying!

 


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