A Matter of Balancing Act

From my conversations with a number of investors and observations, I notice that many of them either do not practice diversification of investments or do not have a clear strategy how to do it. Some of them invest only in one class of assets, most prominently stocks, or in some cases, only in ONE STOCK! What happens when market takes a downturn or the only stock that you bought doesn't fulfill its "potential"? You simply lose your money!

NEVER PUT ALL YOUR MONEY IN ONE BASKET! A better approach will be to diversify your portfolio, ie., invest in different categories of assets, in order to leverage or manage your risk. This is what we term as Portfolio investment allocation. e.g, you can consider combination of stocks, unit trust (mutual funds), bonds, real estate investment trusts (REITs), property funds and other fixed income instruments, and assign a percentage holding in each of them. The percentage of allocation will depend on your risk profile and the current climate of investment. eg., 60% in stocks, 15% in property funds, 15% in mutual funds, 10% in bonds, etc. The advantage of this asset allocation is to reduce your risk of particular choice of investment going the wrong way. Afterall, it is imperative that any kind of investments will go through the triumphs and plunges in a different moment, given the change in economic factors, politics and environment. Economics is such a complex animal that almost every country will experience the economic booms and recessions at a certain point in time!

There are other considerations in portfolio diversifications, such as within the stockmarket itself, consider allocation of defensive stocks (eg., blue chips, high dividend yield stocks) vs aggressive and high growth stocks. In a bull market, it is wise to pick some aggressive or growth stocks in order to ride on their strengths, but include a smaller portion for defensive stocks so that you will not be caught completely flat-footed in the event of an unexpected downfall.