To Diversify or Not?

Image by Getty Images via Daylife I have been emphasizing the need to diversify your investments and not to concentrate most of it on just one single investment.

Yes, there will be investors who quote wisdom from warrent buffett or other stock gurus on the merits of concentrated investment and knowing your investment real well. That diversification is actually an excuse for ignorance.

But how many of these so called amateur investors think they are really in the class of the gurus? Unless they have proven themselves using a diversified portfolio that they have a knack for picking good companies (in which case, the overall stock portfolio would rise in value as well), they should not attempt to do concentrated investment.

Also, there have been numerous studies by private banks that a lot of entrepreneurs and CEOs have a bulk of their wealth tied to the fortunes of their companies (in the form of shares & options). As can be seen during the past few crisis, a concentrated holding (even for CEOs and chairman who knows their company and industry inside out) could not prevent the erosion of their wealth. In some cases, the company going bust (some internet companies, some banks) have allowed their employees to go from millionaires to zero-aire.

So, before you start having this fantasy that you are in the league of the investment gurus, please validate that statement first. Are you in that league yet?

For myself, I admit I'm not in the league of the gurus and to know I am not and to implement a safer risk-managed investment strategy will lead me to multiply my investment portfolio slowly but steadily.

Don't depend on a retail banker or insurance advisor! Look For A Wealth Manager!

Have you been approached by financial advisor/planner who trigger your emotional button like if you care for your family, then you should buy a whole slew of insurance related products (whole life, investment-linked, endowment) to have a comfortable retirement. Yes, someone is retiring comfortably, and I bet the person is most probably not you.

Have you ever walked into a bank with the personal banker selling you products (8% coupon payout- no risk! capital protected) that are on promotion with gifts? Did they even bother to find out what investments you have, your risk profile, time horizon? Have you asked them whether they are personally invested in these type of products or are they just following the sales script and promoting all the goodness of the products? Have you ever asked them do they need to meet a sales quota?

Ok, I may be generalizing here, but you get the idea.

When I first started looking for wealth management solutions, I turn to the private banks as they have always been the first choice for people to entrust their money with. From there, I begun to see the difference in the way they do wealth management. It is a process that is both systematic and holistic. I'm not saying that private wealth management is the holy grail but at least there is a system in place that will make it easier for you to build your wealth upon.

Wealth management is a long-life commitment and it is crucial that you find the right wealth management firm or partner for your wealth journey.


The figure was taken from a ML/CapGem Wealth Report and I found it quite reflective of the spectrum of wealth management service available.

As you can see at the rightmost spectrum, there is no wealth management solution presented and the advisory service is typically product-driven solution and transactional. I would classify most of the personal bankers and insurance agents in this group as they typically sells products and try to convince you that the product meets your needs. If you show interest in the products, they will give you a risk-profile form and ask you to fill in or vice versa. They will then give you the product. They are typically remunerated based on commission from the products or they have sales quota to meet, thus, they have to sell something to someone every day.

At the left end of the spectrum, you see the wealth management service is more advice-oriented and client-driven. It is commonly fee-based approach where you will pay a certain percentage (usually not more than 1%) for assets under management (AUM). But the bank will still earn any product sales charges and trailer fees it is entitled to and usually, it is a maximum of 2% and no more. Because they are already incentivize by the fee-based approach, they will be more interested in retaining your AUM and giving you good advice for your money, unlike the product-driven approach where commission is how the sale staff earns. The solution will be more holistic with the proper asset allocation and it will be based on your objective, timeframe and risk profile.

To get on the left most spectrum, you have two options:-
1) the private bank as they can spend more time with a client since the amount invested or managed is substantial enough to warrant more attention.
2) an independent wealth management firm (like the one I'm working for right now) who can offer similar wealth management solution to people who demand more from their wealth manager.

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.