Focus on diversified investing?

As the old adage goes, “Don’t put all of your eggs into one basket.” In the same vein, diversification borders along the idea of creating a portfolio which includes multiple investments in order to reduce risks. In theory, diversification eliminates idiosyncratic risks- risks unique to a certain company. Take for instance, when Sete Brasil, a major client of Keppel Corporation, filed for bankruptcy protection, Keppel’s share price plummeted. Or when Jurong Aromatics Corporation went bust when it couldn’t survive the commodity slump last year. Besides idiosyncratic risks, there are also sectoral risks to consider. Say, if you invest all your money into the real estate sector and the government announces property cooling measures or interest rate hikes shortly after. Your investment will be adversely affected, especially so since such government policies are sector-specific and such rate hikes have great bearing on real estate companies given their high borrowings. With such risks prevalent in the market, it is up to investors to diversify to “safeguard” themselves against the unforeseen. 

However, with Warren Buffett advocating focused investing, is diversified investing really worth considering? 

There are 2 school of thoughts on focused investing. 

The first being that with all your money deployed into a select few, you will probably spent more time analyzing the company you are buying into as one minor mistake or a careless overlook may cost you a majority of your portfolio. With so much at stake, it compels the investor to put in the time and ample effort to ensure sound fundamentals and proper corporate leadership to take the company forward before putting faith in its share. 

The other contrasting belief is that with focused investing, one will be emotionally attached to the stock and hence make their “buy” and “sell” calls based on emotions and market noises. It is said that with focused investing, one will be so “in loved” with the company he bought into that he tends to overlook screaming facts depicting  impending crisis. 

As with all approach, there are two sides of the argument and it is up to you to decide whether focused or diversified investing is for you. It is also important to note that Warren Buffett is a natural. He is able to identify good businesses very naturally. Despite us wanting to be a Buffett, not everyone is as gifted as he is. 

Stay Tuned,

Aspiring Lynch

Wonders Of Compounding

According to Albert Einstein, “Compounding is the eighth wonder of the world.” But with bank interest rates at record low, are we really going to sit around to wait for our money to grow in the bank? Besides, interests on deposits hardly- if ever- beats inflation. Putting your hard-earned money in the bank now would mean having less- in terms of purchasing power- to spend in the future. Simply put, keeping your money in the bank erodes its value. Consequently, financially literate individuals would turn to the stock market as an alternative to compound their money. Compounding is essentially how your money will grow over time. With the example given below, how much compounding can do to grow your cash pool will blow your mind.

Say, there are two friends of the same age, Alice and Betty. Alice starts investing at age 20. She invests $3000 yearly till the age of 30. In other words, she puts $30 000 in her portfolio over a 10 year period. Betty on the other hand, starts investing at age 30, with a yearly injection of $5000 in her portfolio for 10 years. By 40, she would have contributed $50 000 to her portfolio. Assuming both Alice and Betty are able to generate a conservative 6 per cent on their portfolio yearly, at age 40, whose portfolio would be greater?

If you thought Betty would have more in her portfolio, then let me show you the magic of compounding.

Year Alice Betty
2020 $3000
2021 $6180
2022 $9551
2023 $13 124
2024 $16 911
2025 $20 926
2026 $25 182
2027 $29 692
2028 $34 474
2029 $39 542
2030 $41 915 $5000
2031 $44 429 $10 300
2032 $47 095 $15 918
2033 $49 920 $21 873
2034 $52 916 $28 185
2035 $56 091 $34 877
2036 $59 456 $41 969
2037 $63 024 $49 487
2038 $66 805 $57 457
2039 $70 814 $65 904
2040 $75 063 $69 858

By 2040, Alice will have $75 063 in her portfolio compared to just $69 858 in Betty’s despite ¬†Betty coughing out $20 000 more. Additionally, dividends from the stocks were excluded in this example. This means, Alice would have significantly more in her portfolio if dividends were to be thrown into the equation.

In summary, the earlier you start, the greater your rewards. Even with lower capital now, you will still be able to beat your future self- even if your future self invests more- with the power of compounding. With perseverance and time, your money would grow like you have never imagined. Like what the Dow Theory states, “Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it.” So why wait for tomorrow when you can start today?

Stay Tuned,

Aspiring Lynch

Starting Out

Never in my wildest dreams have I thought of blogging about my investment journey, but having followed local investment blogs like Forever Financial Freedom, Mr IPO or even The Motley Fool, I felt a sudden urge to start detailing my investments. Hopefully some day, I’ll be able to come close or even surpass such high standards of investment insights. “Why blog- and not keep track of your investments in a diary?” you may ask. Well, having my “buys” and “sells” logged in a diary would not have me receive constructive comments about my portfolio. As such, I don’t see why I should not share them openly. Having started investing in shares only in 2015, I do consider myself a rookie investor and would welcome- with open arms- any value-adding opinions about my posts or portfolio. Hopefully, through this platform, I am able to convince you- or at least get you started thinking- about the wonders of investment and how with time, it is able to lead you to achieve financial freedom. With me- aged 20- as an example, let us walk through the world of investment together. 

Stay Tuned, 

Aspiring Lynch

DISCLAIMER: 

This blog exists on the passion of the blogger and its contents should not be construed as an offer to buy, sell or to participate in any transaction or trading activity. The contents are based upon or derived from information generally believed to be reliable and available to the public. The posts merely represent the stance of the writer.