Diversification exposes more Risks

There are numerous articles about diversification in your financial portfolios. Even MoneySense, an educational feature under MAS, also speaks about diversification to spread or reduce risks.

Hmm... Not trying to steer away from the main stream of thinkers here, but i will like to offer another perspective about diversification as food for your thoughts.

In my opinion, diversification exposes myself to more risks, IF i do not have the education to manage the additional areas that my investments are exposed to. (Education is defined as Skills, Knowledge and Experience)

Quoting an example to illustrate my point. Imagine myself investing in a blue chip company say, DXS Bank Vs STI ETF (a groupings of 50 bluechips listed on SGX). STI ETF can diversify my investment into 50 companies at once. Does this reduces my risk exposure?

While i can find alot of information about DXS Bank, past 10 years performance, the banking sector situation, postulate next 10 years growth, the risks associated in terms of macro and micro views of this bank, i can effectively managed the systemic and non-systemic risks better. It is only one company and i can focus my time and effort to manage it better.

By investing into STI ETF, i am effectively exposing myself to at least 550 times more risks as the ETF is invested in 50 companies spanning over 11 industries. Which means in order to manage the risk exposure better while staying invested in this ETF, i must spend 550 times more time and effort in my study of this ETF (and what it is invested in). Wow!! I don't think i am willing to and also not able to commit such resources to study into this aspect while the return seems comparable to the one company i may be invested in. IT's 550 times lor!!!

Many people think that investing is easy. I say gambling is. If i am not ready to commit that resources to educate myself about that product or instrument, its better to avoid it. So much for diversification, ya.

I do not deny that diversification has its advantages. Should there be an opportunity (backed and confirmed by study and education), a systemic one, that the broad market is likely to improve tremendously over the next few years, and i have limited funds to invest in most of the listed blue chips favoured, then STI ETF becomes a great tool in this situation as it can diversify my effort into the broad market at once. Thus meeting my investment objective in this case.

So you see, it is not diversification that reduces my risk exposures. It is my education that does the job. More often than not, majority of the so call investors will be too lazy to study into their investment with 550 times effort before they plunge in lor. Thus they are effectively exposing themselves to more risks! Unfortunately, this particular group of so called investors like to comfort themselves by saying that their risks have been spread out. Mind you, the word is "spread", and "reduce"! :-O

So get educated before you diversify. Else, FOCUS on the investment or instrument that you know best and stay invested with it. You will be able to see better gains on that side of the fence.


Warmest regards,

Leroy Ang

"When I Stop Learning, I Stop Living"