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Thursday, 23 February 2012

100 stocks in SGX = Diversified?

Of course it's an extreme figure!

Some investors will not let one stock exceed 5% allocation in their portfolio. This is to prevent 1 stock blow-up from damaging their entire portfolio.

This I can understand. But I curious.

Whether its 1 big water-melon, or a few apples, or a bunch of grapes - aren't they all in the same single basket?

So if it's Sept 11, SARS 2003, or other external shocks, when the basket's bottom fell out, won't all the fruits be smashed?

What if we spread our equities holdings over several markets? But aren't all stock markets more or less correlated? Did any stock exchanges in the world held-up during the 2008/9 financial crisis?  There must be some. If they are; we probably don't have access due to currency controls, liquidity, or restriction issues ...


I do own some silver, RMB, bond fund (indirectly through pension fund), EURO and of course SGD. (A glaring gap is investment property)

Do you practice asset allocation to diversify against risks? Or do you stick with "quantity diversification" in the same asset class as your main form of diversification? 


How is your experience? Which works better? Or do you practice both?
 

40 comments:

  1. me first, ok.

    my mother in law have her money all over the place. saving account,fix deposit, physical gold (may be silver also) fix deposit, few insurance policies, some shares and god know what else!

    with her memory start to go hair wire, she is in a panic to locate all her money. seek help from my wife.

    don't diversify just becos everybody is doing it. think of how to recover it if suddently you no longer living on this planet.

    for investment, well at least this one i know, only invest in what you know.

    ReplyDelete
  2. smol, why do you own silver? why you keep RMB and euro? lazy to change (to SGD) right?

    ReplyDelete
    Replies
    1. haha i forget the bond fund. why so many? money management start from home. the easier you can control your money, the better it is. don't put them all over the place.

      Delete
    2. same principle apply to trading and investing.

      Delete
    3. LOL! OK, I think I will blog about my journey with currencies.

      Not too lazy to change lah!

      Delete
    4. don't blaff! you earn them in your job, so you keep them. does it make any investment sense? absolutely no.

      Delete
  3. so how do i manage (keep) my money?

    becos i'm a speculator, as of now i keep all my money in cash (saving a/cs) and margin accounts. no fix deposit, no insurance, no bond fund, no other places except those that are untoughable.

    ReplyDelete
    Replies
    1. Hey!

      I finally found a qian bei class speculator with no insurance!

      I'll be following you soon. Bought my whole-life policy at 27. In another 3-4 years, I'll cash the policy in. It has out-lived its purpose ;)

      Whole-life breaks-even after 20 years.

      Delete
    2. many comment haha, why wait 3,4 years? you have to learn this, if is a bad things, bad trade, bad investment bla bla bla, just cut it off right away. must wait for break even mah? i guess thats a mentality that get so many people stack in bad investment or trades for so long.

      before you do, make sure no one depends on you for future income.

      Delete
    3. can't comment too much on stocks, i view stocks as another vehicle for trading, just like stocks indexes futures. i don't trust individual stocks, don't trust anybody. just becos i don't know much about the companies and much about investment.

      every time my idea of investment, including biz, stocks, property, eventually turn out to be a speculative trades haha. i'm just no good at it.

      Delete
    4. Coconut,

      In 3-4 years, I'll be 47. Why 3-4? Well, the surrender value keeps getting revised downwards. Victim of the current low interest "manipulation".

      Artificial low interest is great for risk taking and speculation; but it punishes savers who played by the rules all their lives.

      What is hard-core speculation? It's honest souls of the earth who never invested in anything all their lives, and at 65 flushed with cash and desperate for yields, got sucked into those "schemes" they thought were "safe" - land banking, gold buy-back, complex structure products, etc.

      Delete
    5. smol, trading is about you, not the interest rate, MAS, stock market.

      its about you who have to do the thing you need to do. there are no right or wrong in the market, but there are right or wrong in you.

      Delete
    6. Yes Coconut,

      I alone am responsible.

      I shall only observe and act.

      No Mind. No Morality. No Sensei. No God. No Devil.

      Only the motion of my samurai sword moving through my opponent's body.

      Thank you Master swordsman

      Delete
  4. Hi SMOL,

    It's a question I asked myself too. But I think I sort of reasoned it out already. Just sharing here.

    More stocks just prevents one type of risk from belly-upping you - company risk. If something bad happens to a company, and you have 50% of your portfolio in it, you're pretty much screwed. The downside of protecting against company risk is that if the company that you are heavily invested did exceptionally well, you're are 'protected' from having your wealth rising according to the fortunes of the company. Hence, there is a need to diversify across many companies to prevent any one's failure from becoming your failure.

    However, the other kind of risk that you're talking about - systemic risk - cannot be prevented by diversifying across companies in different stock markets. It can, however, be reduced somewhat by diversifying across different asset classes, like bonds, property, precious metals or what have you.

    In conclusion, if you want to be kiasu and kiasee, diversify across markets with different companies and diversify across different different asset class. As if we have so much money to diversify.... haha

    ReplyDelete
    Replies
    1. Looking at BP and the resulting more than 50% haircut due to the cleanup and compensation costs...

      And look at Tokyo Electric getting hit with triple whammy of tsunami, earthquake, nuclear disasters...

      One is growth, one is defensive. No need to blame and focus on our S-chips. Even super Blue-chips can get whacked with tail-end risk events.

      As for playing in different asset classes, its me trying to re-invent myself from an equities man-whore to a speculation man-whore.

      I have no desire to be a one trick pony.

      I'll rather be the swiss army knife. One tool for each market situation ;)

      Delete
  5. Win money. Where got problem in laughing to the bank. In stock market, it is better to regret than to feel sorry.

    ReplyDelete
    Replies
    1. CW8888,

      Yes, it's better to regret missing a trade than to feel sorry for getting into @@#$^&*! trade ;)

      Your ginger is indeed power! I've to re-read what you wrote to understand in my limited way.

      Delete
  6. Just remember all investment is a "gamble" no matter how you want to look at it. i have said somewhere even if you don't want to invest, you are super kiasu and kiasi, you hide your money in your pillow, you still need to gamble with your money. Why? You gamble for instead of inflation you hope for deflation in the future years. So you can't hide, "LIFE" is one "BIG GAMBLE"
    Therefore don't put all your eggs in one basket is always correct. And since Life is Gambling, always try to load the odds in your favour; That is the least we can do. No?
    Try to cross the road with your eyes closed. Ha! Ha!

    ReplyDelete
  7. i am thinking of buying STI ETF in the next Bear Cycle. Unfortunately we can't use STI ETF for hedging our SGX's portfolio during a super Bull market. In another words, can't we short STI ETF?

    ReplyDelete
    Replies
    1. Temperament,

      ETFs are meant for investors who prefer passive funds over actively managed mutal funds.

      But you can with short with CFD Index or SIMSCI futures.

      We can always do it without leverage.

      For eg: 1 contract of SIMSCI is slightly less than $70,000 in "face value". But we just need less than $5,000 to initiate this trade.

      So if you put up $70,000 into your futures account (instead of the bare minimum margin) it will be similar to shorting the STI ETF, or any other SGX stock.

      CFD Index would need less capital.

      As usual, its better to discuss with your broker. There are different pros and cons between OTC CFD and exchanged cleared futures.

      Delete
    2. Hi SMOL,
      Thanks for your idea. Actually i like direct inverse correlation to my SGX portfolio so that i know and can choose exactly how much % of hedging. If only i can short STI ETF like in US they have all types of hedging products.....REPOST from me:-

      "In stocks investment, there are so many different types of Risks to note, to consider, to hedge. i have been investing for +23 years, i am very ashamed to say, "Till today i still don't know how to hedge my portfolio against a sudden Bear Market Attack. Especially during the time when my portfolio is enjoying a Bull Market Run".
      Please fellow forumers, can you share how many ways you can hedge your portfolio against a Bear Market Attack? And what is the appropriate % of hedging.

      And can these recommended hedging instruments i came across really works? i suspect during a Bear Market Attack, these instruments will have liquidity problem - A lot of sellers and no buyers.

      These recommended hedging instruments are:-

      1)SDS - ProShares UltraShort S&P 500 ETF (A double short on the S&P 500)

      2)SPXU -ProShares UltraProShort S&P 500 ETF (A triple short on S&P 500)

      The above 2 ETFs are recommended for people like me to help me sleep better at night who don't know how to play shorting the markets or how to use "put or call" option for hedging."

      i wish SGX will be as sophisticated as US Stock Market Exchanges, one day.

      Delete
    3. Temperament,

      A quick heads-up - just be clear what "double" and "triple" mean. There are viagra added. Make sure you heart can take it ;)

      I learn and test different hedging strategies from the SGX companies. How SiA hedge their fuel costs. How companies with overseas earnings hedge their currencies exposure. How utilities hedge their interest rate exposure, etc.

      I learn better from looking at the gold fishes.

      Delete
    4. what? your learn dancing by learning from the kungfu master?

      Delete
    5. do you know that these company losing money when they hedge? but it keep their financial at a much stable platform.

      Delete
    6. Coconut,

      I think I will join the dancing classes at our community centres. I'll be back being the "wow, you so young" amongst the "jie jie".

      Hmm... Lose money when doing a hedge? You are right as "insurance" has to be paid, it's not free.

      Steady as she goes!

      Delete
    7. these company makes money by doing what they do, selling products or services. their business (income) does not include speculations.

      so speculations in a way is to assume the risk that these people (the market) does not want. but if you forgo the risk control while doing it, you end up just like them.

      Delete
    8. for these company, it is justify to lose money. they have their main income to support. as a speculator, well we end up eating grass.

      Delete
    9. Ah so!

      Most of the time I am a straight directional player.

      I got lost trying to imitate spread trading. Long one contract; short another contract at the same time.

      But the names sure are interesting! Condor, butterfly, iron-collar spreads... The traders who came up with such names sure got literature in their blood ;)

      Delete
    10. spreader use this technic to locate very small differences between these market, and they have to trade size, other wise eat grass.

      most of the financial institution and private funds are doing it, and as many top traders. these people pray for volatility.

      it involves lots of technical support, strategies, capital, and lots of hard work from the traders.

      before you want to be a trader, know who are the people that are in the market doing what. so know the basis of their strategy. at the very least you know who took your money away. at best, try to beat them.

      Delete
    11. And that's how I came back to my trusty directional swing trading. I speculate BIG or SMALL. Keep it simple. LOL!

      Delete
  8. Do you wish to make money from your hedges or lose your hedges? Which is the lesser evil? Anyone?

    ReplyDelete
    Replies
    1. use hedging only when you find your risk exposure is too high. hence paying a premium is justify.

      good traders will try to take the risk that the hedger trying to avoid knowing that the hedger will lose in the long run.

      the house will always be the winner, not the player.

      Delete
  9. does anyone use share CFD to trade the stock market? this is a very good vehicle to use to short individual stock directly. it also trade using margin from 10 to 50%.

    if you are a serious trader, look into it.

    ReplyDelete
  10. Why would anyone want to short individual stock? That is a very evil act. Just imagine if your stationery shop is able to get listed(wait long long also cannot), and big trader like me come and short sell your bloody company, what would you feel?

    For me, if I see a direction down in the stock market, I'll just short the simsci. However you must first have guts and not just talk in internet only.

    ReplyDelete
  11. i just want to let my SGX portfolio runs and runs in a BULL
    MARKET. Simple, i think in order to do this i need to hedge my SGX portfolio for a sudden appearance of a black swan. i don't know how to do this for 23 years. i am not interested in individual stock options. i think they are too tedious for individual DIY investors. Anyone, any knowledge to share.
    Thanks.

    ReplyDelete
    Replies
    1. In other words, what are the SGX's ETF and Index options available in SGX to hedge SGX's portfolio of stocks?

      Delete
    2. Temperament,

      Maybe you would like to post this interesting question as a new thread in Valuebuddies? I am sure we can get some "inspirations" there.

      I can think of owning gold as an asset that will move in opposite direction as the stock markets when it comes to 911 or other "war events".

      I prefer silver and owned some silver.

      Delete
    3. Actually Gold and Silver will drop in crisis. So far i notice USD will strengthen which is why I sold 1/3 of my Gold recently for dollar.

      Gold and Silver work well if there is high inflation in a stagnant economy. My theory.

      Delete
    4. You are right Cory!

      That's why I was careful to say "war events". Not "crisis" ;)

      During the credit crisis of 2008/9, Gold and Silver dipped together with all asset classes. Cash is king!

      But once quantitative easing started, Gold and Silver became a hedge against paper printing. With risk-on back, everyone seems to be in a hurry to get rid of their cash hoard...

      Wise of you to take some money off the table. That's a kind of hedge for Gold correcting too ;)

      Delete
  12. No guts even to post the low hei and bowling pic in afact and still wanna talk abt guts in investing, I think go find a job better lah.

    ReplyDelete

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