The Number 1 Rule in Investing!

Image via Wikipedia

You have heard stories of traders or punters made good by investing all their money into 1 stock and newspaper stories proclaiming how a trader can turn $1,000 into $100,000 in 1 month or even having 1000% return on investment.

For a beginner to investment, they might be convinced that the only way to get rich is to have concentrated bets. However, that is also the quickest way to the poor house if the bet goes wrong.

For myself, there are 3 rules of investing I stick to.

Rule 1 - Diversification thru' an Asset Allocation Approach
Some of you may disagreed and quote numerous gurus that made it good thru concentrated bets. It's a case of "Put all your eggs in One Basket and Watching it very carefully" versus "Don't put all your eggs in One Basket".

However, you need to know that they are not called gurus for nothing. Some people have the innate ability to see trends and hidden gems. Some people used discipline and smart intellectual ability to find the gems. If you are one of them, I am happy for you! :)

For the rest of us, we can take comfort in using the proven asset allocation principles in our investment portfolio. Yes, investing is not only about shares. Asset allocation is derived from the Nobel Winning "Modern Portfolio Theory" where rational investors diversified their investments into different non-correlated asset classes to achieve an optimal risk return reward ratio. You can read more about MPT in wikipedia.

Thru' a well designed portfolio, investment professionals (including Yale endowment CIO, David Swensen) have found that around 90% of your returns are achieved thru' good asset allocations. The rest of the 10% can be attributed to market timing and stock picking. So, if you are someone who believes in the 80/20 Pareto's Law, you should focus 80% of your energy on doing the simple asset allocation that matters the most!


I'll give you Rule 2 and 3 in the next blog. Time for dinner now.

A View to A Kill

Why am I now 60% in liquidity for my investment portfolio? The reason is that I take a view that the market is poised for a plunge.

That's why I should just stay on the sidelines but not be totally out of the market. I'm lazy so if I'm out of the market, I will not be so diligent in reading news or keeping up. So, you won't have a sense of what's going on. And when sentiments are the worst, you won't know 'coz you are not in the market.

In investing, you have to have an opinion on every investment you make. If not, you will only be following the crowd. And we know how the Lemmings fared! :P

Switching out of Schroders Commodity into Permal Natural Resources

Commodities seem highly volatile at the near-term and a long-only strategy in mutual funds/unit trusts like Schroder SAS Commodity and Agriculture might not be an optimal solution.

Thus, I have decided to switch into Permal Natural Resources as it is a multi-strategy fund which is good for volatile times.

Hedge funds are great in times of volatility and depressed markets. However, they usually underperform the market during bull cycles. Therefore, it is necessary to switch at appropriate time.

Investment Portfolio for July 2008

Commentary:-

• The portfolio returned -0.62% for the month of July.
• Due to the ongoing volatility, it is safer to take profit and have 60% liquidity which consists of cash, money-market and short-term instruments.
• I will cost averaged back into the market when the volatility is not so large.