Tuesday 20 September 2016

Position Sizing and Diversification

First, read this Bloomberg article:

I know, you not interested as you don't have $250K to buy into bonds in a single pop.

Wait, there's a hidden message you are missing.

That's risk management.

What if the accredited investor has 10 million dollars in liquidity (do not count property assets)? Buying an unrated bond and losing 100% of that investment of $250K is not disruptive to his/her lifestyle right?

Some of you may  have participated in peer-to-peer lending. It's the same "greed" as our accredited investor - you hungry for yield mah!

Can tell who is savvier between the two peer-to-peer lenders below?

a) Commits $5K into one single company yielding 10%.

b) Commits the same $5K but splits them into equal $500 into 10 separate companies yielding the same 10% at portfolio level.

If you have answered b), may I ask you if 1 or 2 companies default, is it still savvy to lend money to unsecured borrowers at 10% interest?

Now you know why credit card companies charge 25% interest per annum. Wink.

I think you getting it now...

If big wallet invests 50K into Swiber stock and that position is 2% of his total portfolio, he'll probably shrug it off as a learning opportunity if Swiber goes belly up.

But if you thin wallet invests the same 50K into Swiber because you "monkey see, monkey do"; and that position is 50% of your portfolio, well, you can't complain to anyone because you know the retort back, "He ask you to jump into the river, would you?"  


Yup, that's why they say diversification is the hedge against ignorance, stupidity, and surprises!

OK, some bonus questions before you go to test whether your knowledge is superficial or at conviction level. You know what they say, a little knowledge can do more harm than ignorance...

Here we go:

Is owning 30 stocks in a portfolio diversified enough?

Especially if 40-50% of that portfolio is geared towards financials?

And you have no clue what is Narrow Country Focus risk?



  1. Only Narrow Country Focus risk but no zero beggar risk unlike holding individual stocks. Still quite okay for those with steady mind. Something smaller like property and won't goes down to zero.

    1. CW,

      You are right.

      It won't go to zero. Even during the darkest days of the Greek crisis, if you had bought the Athens Stock Exchange (ASE) index, it didn't go to zero.

      I guess that's some consolation instead of buying individual stocks ;)

      Precious metals and properties exhibit similar qualities. Can be near worthless; but never zero.

      As for equities and bonds, well... I guess they can go to zero if a company/country goes bankrupt or defaults.

      Perhaps that's why institutional investors buy "insurance" as in CDS for bonds or hedge with options/warrants/futures for equities.

      Retail being retail, will talk a lot about medical, travel, life insurances; but when it comes to investments which can go to zero, they swim naked???

  2. Haha. 给你一个赞。*like*

    1. Kevin,


      I appreciate your recent post on Starhub internet roaming pre-paid card.

      I more "mountain turtle" than you when it comes to IT stuffs :)

    2. Aiya, small things that give huge conveniences, share and spread the love. No point hoarding any secrets. Singaporeans love to travel (or "escape") anyway, so I thought it is fairly applicable to many people :D

      I think for many people, myself included, it is a constant learning process. Long ago, buy/pick/hantam stocks. Then, "level up" (or so we thought), buy funds. In future, I think will eventually end up (from pick stock, to pick fund) with picking which asset-class to buy and allocate to. Who knows what the future will hold!


      Anyway, interesting that you mention the global multi-asset portfolio! Haven't heard this term in a while. Came across this website that has various themed portfolios, including this one Global Market portfolio that resembles what you mentioned :


    3. Kevin,

      You used a very interesting term "level up" ;)

      Once we are in the asset allocation game, we are in a comfortable phase... It's more about wealth preservation, and that's where we've hit our "enough" moment.

      Thanks! You have done the verification for some readers who may be thinking I am making things up!


  3. SMOL,

    You're poking STI ETF preacher huh? Naughty boy ...

    1. Yaruzi,

      Ahem. I'm older than you at 49 years young ;)

      Lucky we are not Koreans. If not, you have to use honorifics when talking to me... LOL!

      I poking the 99% of so called passive indexing bei kambings who do not know this little fact:

      The Global Multi-Asset Market Portfolio is the only true “passive” portfolio because it is, by definition, the only index which is not chosen with investor discretion.

      An index like the S&P 500 or STI, is an actively selected group of companies that represent a slice of outstanding global stocks.

      That means by choosing a tiny slice of the Global Market Cap Weighting, we are already making a conscious and active decision to DEVIATE from "true" passive indexing ;)

      And the irony? I not even a passive investor!?


  4. temperament,

    In living memory, I can only think of Zimbabwe where the currency became near "worthless".

    That meant if you are still in a country when the currency is near "worthless", you have other much bigger problems to worry about!

    Never mind philosophical discussions on ETF and individual stocks!

    That's perhaps why before a country collapses, the first to go are the smarter land owners. As was the case for Zimbabwe when it was known as Rhodesia.

    Those white land owners who stayed paid a heavy price...

  5. Hi Jared,

    Recently I was also thinking of this question. Suppose you only have 10k to invest, buying 30 stocks is siao right? To diversify, there should also be a minimum amount that outweighs the transaction costs. Some tips for me?

    1. Jes,


      Unless you want to use that cheapo platform to buy in multiples of 100 shares. But then, I'm not a fan of budget airlines; I prefer to fly full service airlines ;)

      Driving with spike in wheel approach

      Go all in with one single stock. Its a great way to find out whether you have conviction in your investment thesis or stock pick.

      Win and win big time; lose can lose everything!

      Individual stocks can go to zero.

      Somehow I don't think you will plonk that 10K into Marco Polo; but putting it all in into Singtel or OCBC is not exactly "gambling", is it?

      Drive with airbag in wheel approach

      If you are bullish on our local banks and Singtel, then buying the STI ETF can be another alternative.

      Yes, in theory you are diversifying over 30 stocks in the STI ETF, but in reality what you are buying is 4 stocks - 3 local banks and 1 Singtel; together they make up almost half of the STI weighting.

      You know your STI ETF won't go to zero, but you also know during the 1997 and 2007 market crashes, you can lose more than 50%...

      Caveat: Stay away from STI ETF if you have no clue how to value banks and telecom stocks, or you bearish on them!

      You know what? The 2 best stock tips I've read are:

      1) Buy low; sell high.

      2) Only buy stocks that go up; stocks that don't go up, don't buy.


    2. Hi Jared,

      Your tips like not very good leh.... obviously! Haha. Of course, my first foray was a single stock and luckily I did earn a bit so that led to my overconfidence.. Oops. I am already invested in STI ETF as my passive investment. Good reminder that the basket is heavily tilted to banks and Singtel. When market crash, buy more! :)

      Anyway, so when do you decide to diversify to different currencies? Is there an amount after you hit for local stocks?

    3. Jes,

      I just saved you $3K!

      Bei kambings spend that amount on seminars/workshops to get tips similar to the 2 tips that I have shared with you ;)


      My first awareness on currencies was when I was posted to Shanghai. I had to choose my split between HKD and RMB for my salary.

      It was interesting to see the RMB appreciating aginst the HKD and read stories of savvy HK citizens depositing and converting their HKD into RMB by crossing the HK/Shenzhen border.

      Then I moved to Athens, and it was no fun seeing my salary getting smaller and smaller due to the weakening EUR. That's when I started hedging by selling EUR currency futures.

      Who knew that led to outright currency trading whe I came back!?


      It was not a dollar amount. It was more from neccesity due to my work experience overseas.

      Today, my networth is denominated under 4 currencies: EUR, USD, RMB, and SGD

      Nothing special lah. No different than our savvier Malaysian or Indonesian friends who park some of their wealth in SGD and/or USD. We know what happens to emerging markets currencies whenever we have a severe bear market ;)

    4. Hi Jared,

      Got it! So yours is driven by a need. I have no need for foreign currencies though... Hmmm. When did you decide to invest in other countries' stocks then? Anyway, thank you for the 3k lecture! (and reminder not to waste money on those seminars):P

    5. Like that I also into forex with RM & TWD. :-)

    6. Jes,

      When I were in Athens.

      Take advantage of your corporate and leisure travels.

      Singaporeans tend to be quite parochial. I believe a Thai, Indonesian, or Vietnamese buying their own backyard stock exchange ETF will beat our STI ETF hands down in the next 20 years ;)

      SGX after a while is always that few stocks. I'm quite agnostic. I do mutual funds, ETFs, individual stocks, stock indices, currencies, and precious metals.

      Glaringly missing is properties :(

      I shamelessly fashion myself as a nano Global Macro Hedge Fund.

    7. CW,

      Of course you are!

      You will immediately switch RM and TWD back to SGD if you think SGD will appreciate going forward.

      Ordinary Singaporeans make similar decisions all the time.

      What? GBP weaker against SGD? OK, let's book holiday to UK this Dec!

      Aiyoh! USD getting stronger... Ah boy, daddy cannot afford to send you to US colleges liao. Can consider Australia or UK universities instead?


    8. Switching cost is another cost. No switching. I keep it and top up for the next trip.

      For RM, I watch it more closely to average down whatever it is good to do so or else do at market rate of the day. Regular forex in RM. :-)

    9. CW,

      Now that I trade spot forex and currency futures, when I see the bid and offer spreads offered by money changers, I feel like joining them!

      Its very lucrative!

  6. Understanding what did happen, what can happen and what usually happens can help us to set the proper risk controls like position right-sizing on ourselves and our portfolio. And then stick with it.

    The latter part is obviously the real challenge.

    Admitting that I have no idea what's going to happen in the future is another good motivator for spreading my money across a wide range of investments, asset classes, and geographies.

    As some clever guy once mentioned: "Diversification is the 'what-if-I-am-wrong?' portion of th einvestment process."

    1. Andy,

      During my wealth accumulation phase, I focused.

      Once I had "enough", I diversified.

      There's a time and season for everything ;)

      It resembles this "truth" after watching loads of HK gangster and Hollywood mafia movies.

      When you are a nobody trying to make a name for yourself, you volunteer dangerous "jobs" to whack your competitors or be the first ones to rush at gangland fights or shootouts.

      Once you rise up to be a Boss in the organisation, you want to avoid fights and conflicts as much as possible...

      Why take the risks when you have it all?

    2. Hi Jared, great analogy.

      One just needs enough luck (skills?) to survive those dangerous jobs. If you gave up after you have gotten your first bloody nose, you would never have risen to become a boss.

      Without the ability to take blows that career ambition might easily have ended by throwing in the towel too early.

      Not everyone can become boss. Nobody would be left to serve under the boss and provide for him. How?

      Investments strategies are only perfect in a sales pitch. Your unique situation and personality type should dictate your philosophy. No style will work for everyone.

    3. Andy,

      True, not all can become bosses, thankfully!

      And there are those who can but have no interest in becoming a boss - the ronins, free agents, freelancers, man of leisures; etc.

      You and I have been to countless team building, leadership workshops/seminars during our corporate days... How many of them looking back can we honestly say have made a meaningful impact on our lives?

      Most of the overpriced investment/trading seminars are basically motivational sessions in disguise.

      After the "heroine high", the participants will crash down back to earth... The smarter ones will reflect whether they have paid to learn investing/trading, or did they pay to have a good time or to feel good about themselves ;)

      For that magical few hours or days, no one puts us down, pour water on our dreams, or criticise us.

      It's all - If you think you can, you can!


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