Shiva Sachaphimukh from Farnam Tree gives his insight.
Even if you are unfamiliar with investing, the phrase, “do not put all your eggs in one basket,” may ring a bell. Concentrating your interests in such a manner puts you at the mercy of one outcome. This can be extremely rewarding if it works out, and very painful if it does not. There is no need for you or your portfolio to be in a sink or swim situation.
One of the concepts we find useful in investing is to think about a range of outcomes. Diversification provides you with a broader range of scenarios. Done prudently, it can allow you to capture the growth that many investors look for, while also providing a degree of protection.
Doing this is easier than ever. Access to investments in different geographies and types of assets is widespread, and no longer limited to those at the top of the wealth pyramid. However, be careful not to over-diversify, as the benefits will become marginal at some point and can be a headache to manage.
Spread Investments Across Asset Classes
Investment portfolios need to balance various objectives such as growth protection and income. Different assets help you meet these needs. For example, equities are a great tool for capital appreciation. The U.S. stock market has grown at a rate of 10 percent per annum for the past century.
You may think, if equities return 10 percent, why bother investing elsewhere? Unfortunately, stock market returns are sporadic and there are periods of pain. For example, last year, global equities fell by close to 20 percent. Assets such as government and corporate bonds tend to perform better during periods of stress and can provide your portfolio with a cushion during challenging periods.
Depending on what your objectives are, balancing assets with differing characteristics will help you greatly. The benefits are that when there are periods of growth, you will be able to participate in the upside, and when there are eventual drawdowns, your portfolio is not permanently impaired.
Invest Outside Your Country
Home-country bias is evident with investors in many countries, including Thailand. Investors tend to favour investing in the country they are living in, due to ease and familiarity. But the easy choice is not always the most rewarding.
Equity market returns in Thailand over the past decade illustrate this point well. The Stock Exchange of Thailand (SET) has returned less than 2 percent per annum since 2013, vs 7 percent for global equities in Thai baht terms. Whereas your money would have more than doubled if you invested in global equities during this period, you would only have had a 20 percent overall gain if you invested in Thailand.
Investing in global markets from Thailand is fairly straightforward nowadays, and you can use this to your advantage. Investing abroad exposes you to some foreign exchange risk, which we believe is acceptable given the benefits on hand.
Beware of ‘Diworsification’
Too much of something can lead to undesirable outcomes. Over-diversifying can lead to ‘diworsification,’ where you are increasing risk and complexity without the same benefits. Adding more assets simply for the sake of diversification, without considering whether the asset warrants a place in your portfolio, can be a recipe for disaster.
Investors need to strike a balance in order not to dilute returns. This is best done by ensuring that the added investment aligns with your investment goals.
SHIVA SACHAPHIMUKH is a Director and part of the investment team at Farnam Tree. He is a licensed Investment Consultant with the Thai Securities and Exchange Commission (SEC).
Farnam Tree is a boutique investment and wealth management firm based in Bangkok. The company is a licensed Investment Advisor under the Thai SEC and Ministry of Finance.