If your investments are narrowly focused, i.e. putting all money in one particular asset class (e.g. shares), or focusing on one sector of the economy (e.g. retail), or focusing on a single country, you are not adequately diversified. The risk of losing substantial amount becomes real when the particular asset class, or industry sector, or country has suddenly dipped.
It is advisable to consider asset allocation in various asset classes and invest in broad ranging industry sectors and various countries. The rationale of this practice is that not all investments are positively correlated with each other, i.e. investment values move up or down all together at the same time. A gain in one investment can offset the loss in another with the net effect of change is still in your favour.
In planning your asset allocation, you have to consider your particular financial situation. If you are still young and have potential earning power for a number of years, then you can afford to take more risks and this can result in higher returns on your investments but on the flipside you can also lose big. However, if you are near retirement age, then you should not take unnecessary risks but go for safer investments with less wild fluctuation in values of your investments.
In order to know your asset allocation percentages of each investment classes, you will have to keep records of all your investment assets, such as shares, unit trusts, bonds, bank deposits. You will also need to look at the specific investment and determine whether it is narrowly focused e.g. investment in a specific country. Only with this disciplined approach, will you know how your asset allocation is like. From this knowledge you can then make investment decision to shift your money around from different investments in order to balance your risk acceptable to you.
Written on 11/17/2006 10:33 AM
Copyright © 2006, the author known as LKT in Singapore.
The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.