Investing Basics: Diversification

What is Diversification?

In the financial context, diversification is the spreading out of your money into different investment assets. The goal of diversification is to achieve an average return over the long run, as compared to being absolutely correct in a selected investment. It is possible to beat average market returns in the short term, with lucky entry and exit timing.  However, an investor should be looking for stability and growth in the long run.

How do I diversify my investments?

While diversify your investment is not a guaranteed profit-making strategy, your investment portfolio is spread out across different asset classes during the period of market uncertainty. Losses will be minimised as exposure is not concentrated into a few investment assets.

Here is how you can achieve diversification on your portfolio:

Invest into different asset class: Spread your investment portfolio into Cash, Bonds, Stocks, Mutual Funds, Commodities, and REITs.

Vary your risk level: Securities holding should vary in risk. Instead of solely holding Blue Chips stocks, hold some Mid Cap or Small Cap companies. Similarly holding some higher yielding Bonds instead of only Sovereign Bonds.

Diversify by sector: Manage your exposure by investing into various economy sectors such as Financial, Consumer, Energy, Healthcare, Technology and other major sectors.

Manage your exposure: Ensure that your portfolio is spread over different investments regions such as Europe, Asia and US. Diversify between Developed Markets, Emerging Markets and Frontier Markets for higher exposure.

How often do I need to make changes to my investment portfolio?

Portfolio balancing and switching is an ongoing affair. Market cycles and changes in policies of major countries results in an ever-changing economy. At market peaks, profit has to be taken and rotated to other asset class. Cutting out from losses may also be applicable when an unfavourable situation occurs.

Read about: Investment Portfolio

Who can help in managing my investment portfolio?

For most of us with other equally important priorities in life, a full-time focus on your investments may not be practical.

Mutual Funds also known as Unit Trust Funds are regulated by MAS in Singapore. The fund management company manages your investments in their investment funds and charges a fee for the work they do. An individual investor may consider unit trust funds that meet their investment objectives. As the unit trust is managed by professionals, a lesser effort is required for monitoring by the individual.

Work with an experienced financial adviser to communicate and set the financial objectives and goal you wish to achieve.

Drop us a message should you require additional information and we will get back to you on your questions as soon as possible.

Read about: Unit Trust Funds