Monday, January 6, 2020

Portfolio Diversification Review

I am firm advocate of investment portfolio diversification when it comes to picking your own stock. If your portfolio only consist of local companies listed in SGX, you could be missing a lot of gain from overseas markets which have vastly outperformed STI in 2019. In my earlier days of investment, my biggest mistake was focusing on narrow scope of investment basket like Clob or S-Chip shares listed in SGX and lost it all.  Throughout the years, I have adopted a strategy to invest in different financial instruments across multiple markets. As a fixed income investor, there is also not much choices of quality bond and preferred shares listed on Singapore bourse, one can only mitigate risk in bond investment by looking at the largest bond market in US.

Diversifying your investments means not allocating all of your money in just one financial “basket”. Instead of investing in a single security, diversified investors put their money into a variety of different stocks, bonds, mutual funds and exchange-traded funds (ETFs) across different geographies.
The idea is that if one of your investments goes down in value, there’s a good chance that another investment will go up in value. In this way, diversification helps you keep your financial life in balance. Diversifying may help you earn a little more on your investments, but the greater value is that diversifying helps reduce your risk of losing money.

The most basic type of diversification is by asset class. For example, your investments might be comprised of 70% stocks  and 30% bonds . The diversification strategy will depend on your time horizon when you’ll need to withdraw your money for retirement and risk tolerance.

You can also diversify your investments using a mix of other factors: 
• Geography: You could invest in both U.S.-based and international funds. Within your international funds, you could diversify further by investing in both developed financial markets and emerging markets
• Investment style: You could invest in growth stocks, undervalue stocks (value investing) or fixed income. Owning a mixture of stocks/funds that adhere to different investment style is another way to add diversification to your portfolio. 
• Investment class:  Stocks , REITs, Preferred share, Bonds, MLP, ETF etc. 
• Company size:  Large-cap” companies, mid-range companies are “mid-caps” and lower-valued companies are “small-cap” firms. When you diversify your portfolio by company value, you might invest in a mix of large-, mid- and small-cap stocks or stock funds. 
• Industry sector: Well-diversified investors ensure that their money is spread over a number of different parts of the economy, such as real estate, consumer, energy, finance, technology, manufacturing and so on. When one industry is lagging, chances are good that another industry is steadily earning or even booming.
In this article, I will illustrate how I diversify my portfolio by showing my top 30 positions which contribute 66% of total investment portfolio. None of top positions exceed more than 5% except my top position BPY which is itself very diversified in term of different real estate class it is managing. My average share holding of each position is about  2+% so this means if any of the company I invested goes into bankruptcy, I will only lose that 2+%.

As I am mainly a fixed income investor, my portfolio is lacking in growth technology stock diversification. This is due to my low risk tolerance as I approach retirement, I tend to avoid volatility. However, this means I miss all big capital gain from S&P500 and Nasdaq. If you are a young investor with 20-30 years of time horizon,  growth technology stocks should be the biggest component of your diversification. 

Geography Diversification of my entire investment portfolio:

Investment class: 
 
 Industry sector of top 30 position:

As you can see from the distribution charts that REIT is my largest investment class as I like the consistent dividend distribution that will be my main retiring income beside interest received from my bond portfolio. Even within REIT, there are various property class like office, retail, industrial, multiple-family and hospitality. BPY (Brookfield  Property Partners) REIT is my largest holding due to its management of diversified property class .  From BPY investor presentation, we see a full range of asset expertise executed by its managers.

1) BPY (Brookfield  Property Partners)




2) Cromwell European REIT
My second largest holding is Cromwell European REIT is listed in SGX and also hold a diversified of property class across Europe.




3)  My third largest holding is Keppel Infrastructure Trust which is the largest diversified business trust listed in Singapore with over $5 billion in assets under management.KIT’s portfolio comprises strategic businesses and assets in the three core segments of Distribution & Network, Energy and Waste & Water.