15 September 2020 - Diversifying
Diversifying is something that we keep hearing and those "GURU" will encourage you. What is real diversify ? Do not be surprise that many individual feel that they are diversify but they are actually not.
Xiao Ming is new to investment and a "GURU" tells him that he must diversify and must not put all his eggs into a single basket. Therefore Xiao Ming set up a broker account and CDP. Xiao Ming then decided that he wants to go for the FIRE movement and so he buy stocks that give dividend. Somewhere down the road, Xiao Ming was psycho by pretty agent to buy saving plans which require 5 years's commitment.
To Xiao Ming, diversify basically mean to hold different investment product in his portfolio.
Xiao Ming's Portfolio
DBS: 200 Shares
UOB: 200 Shares
Singtel: 2000 Shares
Hourglass: 3000 Shares
STI ETF: 1500 Shares
Some endowment product that actually focus on SG Stock markets.
If we look at this portfolio, DBS, UOB and Singtel are actually part of STI Component and thus when they falls, the STI will likely fall. On top of that his endowment product focus on SG market will likely mean that they have component of STI as well. On top of that, his sector are not well diversify, main bulk are from financial sector. Thus Xiao Ming is essentially holding more than 200 Shares of DBS in his portfolio. His portfolio is a typical anyhow diversify. When 1 stock falls, likely the rest are all falling.
On the other hand, Xiao Ming's friend Xiao Hua has a different idea of diversifying. Xiao Hua is also new and also invest in the idea of FIRE and want to live on dividend in future.
Xiao Hua's Portfolio
DBS: 200 Shares
YZJ: 2000 Shares
CMT Rest: 2000 Shares
Gold: 10 gram
Some ETF that focus on Taiwan
A look at Xiao Huat portfolio will show us that her portfolio has various industry. Furthermore, there is no repeated investment. Meaning there is no other product that is actually investing in what she is already holding. This is the true diversifying.
Don't put all your eggs into a single basket is easy to say and understand. However, it is difficult to really grasp it as you might feel that you are separating the eggs but you are actually just adding eggs into a same basket that is package differently.
Be sure of the product that you are actually buying. I made this mistake too and is still paying the price it. So please do not make the mistake that I make.