A Tale of Diversification ( Part 1 )
As you may notice from my portfolio (here ) which is very much skewed toward high yield counters like REITs and Business Trust. I would recognize and think that this is not good in the long run as asset concentration in just one or two sectors in my portfolio, as such, I try to diversify and accumulate some non-REIT or Business Trust counters when the situation allows.
I have picked up some stocks like Telcos, Banks and Conglomerate since 2014 and of course every industry has its cycle and challenges, some of my investment turned out be in lost and some in profit. Always remembers that in any investment,” sometimes we win, sometimes we lose “, and business profitability is really unpredictable as the market move in cycles.
As of today , my investment in 3 telcos are not doing well and I am still sitting with paper loss of around -$14 K (including dividend received ) while for Conglomerate ( Keppel Corp & Sembcorp Ind) are just barely break-even with some profit of $1.5 K.
Both sectors are having their own set of problems like new entrant of 4th Telco and slumping oil price which affected Keppel Corp and Sembcorp badly.
Telco is really facing the challenge of declining revenue even before start operation of new 4th telco as you may see from the latest result announcement from StarHub and M1 which have double digit decreased (%) in their profit.
(The) Boring Investor (Mr Lee Chin Wai ) has few very good blog posts on the topic of Telco's industry: The Telco Landscape in Singapore (here ), Can Telcos Stop the Decline in Profitability (here ) and Do Telco Investors Need to Fear the Fourth Telco? (here )
Investors starts to "feel the pinch" as StarHub decided to cut their dividend in the latest financial result announcement, overall, the industry will continue to face the challenges with increasing cost ( on new spectrum auction ) as well as declining revenue ( structure change in pricing strategy ).
Market may see some rebound in these sectors once a while with news on “merge and the acquisition “ which I may take advantage of re-positioning my portfolio while collecting the dividend at the time if stock price moving sideways.
Some experts said: “,,,, be certain that you will never achieve extraordinary returns with a diversified portfolio. To achieve extraordinary returns you must by definition choose to not diversify. “ or as this blog post highlighted “Don’t Diversify for the Sake of Diversification” (here )
What do you think? Do you have any comments or experience to share on recent diversification into stocks or new industry in your portfolio?
Quote Of The Day :
"Wide diversification is only required when investors do not understand what they are doing." - Warren Buffett
“Two things should be remembered, after purchasing six or eight stocks in different industries, the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small, and overall market risk will not be eliminated merely by adding more stocks to your portfolio” Joel Greenblatt
“The number of securities that should be owned to reduce portfolio risk is not great; as few as ten to fifteen holdings usually suffice.” Seth Klarman
/////Appendix : Trading summary ////
I have diversified from less than 10 stocks in 2011/12 to around 20 stocks today.ReplyDelete
My diversification rules are
(I) I can buy a stock up to 10% of my portfolio
(I) No stock can be more than 20% of my portfolio.
When diversifying, I find that I lowered the bar somewhat for my 15th-20th stock onwards.
Did you also lower your bar to some extent , when you diversify into telco and O&G in 2014?
Thanks for sharing your strategy,,,yah ! It make sense to cap our size in one stock at certain % ...for me ,, not more than 10 % ,,, as I m more " Kia Shi " ...in any case happen to any particular counter ,,, 10 % still something I can " swallow " ,,, :-)
Yah !! U are right ,,, we may hv to lowering our bar when we hv more counters,,,as not all things may turn out as what we want,,,, for my investment in telcos and O&G ,,,,my timing may just not right as these sectors move into down cycle ,,,,due to their reasons,,
I am sure " mean reverting " may happen for these counters ,,, but I m still hoping the " best " and turn around for these industries,,, especially for O&G ,,, :-)
Instead of concentrating on Reits and Equity for Income, we may also consider to invest some in corporate bond (with good rating) that give >4% yield.ReplyDelete
Hi Ray ,Delete
Yah ! Diversification into other asset class like higher rating bond is also one of the option...
Locking to short term bond may allow one to take advantage of market down time as fund or " war chests " will be ready once we hold the bond to maturity... 👍👍
Cheers ! 😃😃
Im sure your telcos will do just fine once the industry news have seen its worse.
Yah, hope the price war will not be so severe once the entrance of 4th telco...and the new technologies like IOT , cyber security and building a Smart Nation will have some positive impact on their revenue...let's keep our fingers crossed !! :-)
What about geographical diversification?
You live in Singapore, you earn your income in Singapore, you invest in Singapore listed companies. Isn't that a bit too risky? What about the rest of the world?
I guess if you’re comfortable with everything you own in your portfolio, you’re not truly diversified.
Anyway we should focus on how our whole portfolios are performing over any individual component. Let's be uncomfortable with some of our holdings.
Proper diversification is a great hedge against our own overconfidence and inability to predict the future.
Yah! U are right, most of us have " home country biase " when constructing our portfolio..but again..from my experience, it seems that when the crisis hit , most of the market will be affected, the high correlation and complexity of market will reduce the effectiveness of such diversification.
I do believe that diversification into " different asset class " may give more protection to hedge again risk of some asset class..hence i m moving more of my fund to short term bond..
You are right ! One should look at the whole portfolio's performance rather than individual component or industry...towards a more holistic approach.
Fully agreed with your point that proper diversification may allow us to hedge against our inability to predict the future and sometimes, our ego and overconfidence in winning the market by few bet of picking some outperform counters in current bullish market.. 😀😀