I thought I was diversified… until the stock market taught me a lesson
Diversification reduces risk, but it does not eliminate it. Some investors prefer to have a concentrated portfolio of just a few stocks. This way, they can get outsized returns. The problem with having a concentrated portfolio is the huge downside if you’re wrong. This is why most people are better off having some form of diversification.
Like many other budding investors, I used to think that diversification meant spreading your funds across different stocks. How wrong I was.
When all your stocks are in the technology sector, are you really diversified? While it’s true that you are diversified across many stocks, this means little if they all belong in the same sector. This was something I experienced in my U.S portfolio. Luckily, my drawdown was “only” in the range of 30% to 50%. This is not as bad as people who invested in loss making companies. These companies had drawdowns of between 70% to 90%. If you’re one of them, chances are you’ll have given up on investing.
How To Diversify Your Portfolio?
1) Sector Diversification
By concentrating on one sector, you risk a huge drawdown when the sector falls out of favour.
A good example is the technology sector, which has done well in the last 2 to 3 years but is down this year.
The S&P 500 provides 11 different sectors, each having its own ETF.
2) Geographical Diversification
While it might feel comfortable investing in companies from your home country, look to invest your horizon by investing in companies from different countries.
Like most people, I started off by investing in stocks in my home country. Nothing wrong with that, but international markets like the U.S offers greater selection of strong businesses.
My personal strategy:
60% Singapore – for dividends
40% U.S – for capital gains
Why not China? That’s because the government can come in anytime and take 30% of their cash. This makes it hard for me to value the company, which is why I choose to stay away.
3) Asset Class Diversification
Retail investors have easy access to capital markets via investing in stocks.
There’s 2 main reasons for this:
Low barriers to entry- You can easily open a low-cost brokerage (some of which I’ve highlighted below).
Low starting capital- You can get started with just $100.
However, it is not enough to only invest in stocks. Look to diversify by investing in real estate, bonds and even crypto!
My personal strategy:
80% to 85% stocks
15% to 20% crypto
Personally, bonds do not really appeal to me. Due to high barriers to entry, real estate is an asset class that I may explore in future.
4) Time diversification
Time is the best friend of a long-term investor (provided you’re holding onto the right businesses).
Dollar cost averaging over time yields greater results, with lower volatility. What's more- it removes emotions from investing.
What if all this is not for me
If you don’t want to have to worry about the complexity of diversification, then a low cost index fund is for you!
Examples include VTI and SPY. Over a 30 year period, these offer you annualised returns of about 10%. Not something to be sniffed at.
What I’m Using For My Investments:
Crypto
FTX
This is by far the BEST crypto brokerage (in my opinion). Verification and deposit was fast (within less than 30 minutes) and easy. The platform interface is user-friendly and easy on the eye.
Transferring crypto in and out of the platform was also a breeze.
Receive 5% discount on all your crypto trades when you sign up here.
Hodlnaut
I use Hodlnaut to stake my BTC and ETH (for 6.71% APY and 5.65% APY respectively). They offer some of the best rates for staking your crypto.
Get free 30 USDC (US$30) when you sign up and deposit US$1,000 worth of assets here.
Stocks
Interactive brokers (IBKR)
I opened this about 1 year ago. The platform is not too user-friendly, but I like the charts they use to show historical returns.
Earn up to US$1,000 worth of IBKR stock when you sign up here.
Saxo
My first brokerage I opened to invest in the US markets. I love that they give a P&L breakdown, both on a monthly and yearly basis.
Earn up to S$500 per person (depending on your deposit amount). PM me on FB if you’d like to open an account and we can split the rewards.
Moomoo
My most recent brokerage which I opened, just to get some freebies if I’m being honest.
Get 1 FREE SE share and $30 cashback when you sign up here.
TD Ameritrade
The charting software for TD is second to none. The platform even allows you to do backtesting and simulations. My only gripe is that they lack a P&L chart like Saxo or IBKR, making it hard to track your returns.
Note that TD only offers equities listed in the US markets.