EXPERTS all agree on one thing: The key to successful investing is to diversify, diversify and diversify.
This golden rule has remained constant, even as global markets soar and sputter. Having a diversified portfolio of stocks, shares and bonds - instead of parking your investments all in one place - spreads the risks, say experts. In the long run, this strategy should give steadier returns.
But finding the right mix depends on one's long-term financial goals, risk tolerance and time horizon - or how long the money can be set aside, says Ms Karen Lim, vice-president and head of retail sales for South-east Asia at AllianceBernstein (Singapore).
my paper asks her for tips on getting the best out of a diversified portfolio.
How can I diversify my investments?
Combine assets like stocks (growth and value options) with bonds. Stocks are securities that give ownership in companies, while bonds are loans made out to firms or governments for an agreed time period.
They have varying risks and returns, so combining both should ultimately reduce risk.
Investing globally also opens your portfolio to a world of opportunities, as it smooths asset-price fluctuations in different markets.
Rebalancing, or evaluating portfolio performance regularly, means the investor is always looking to 'buy at a low price and sell high', which should lead to higher yields.
Do proper research to pick the best stocks and reduce risk. The more information you have about a company, the more certain you can be about its future prospects.
What impact does a diversified portfolio have on returns?
A properly-diversified portfolio takes advantage of the relationships among different investments.
When stocks in one country are falling, stocks elsewhere in the world may be rising - one balances out the other.
For instance, if a particular stock price plunges by 50 per cent, the investor - if he has only that investment - would suffer a 50 per cent loss. But, if he has invested in 10 different stocks, the price drop and potential loss is minimised.
Historically, bonds often do well when stocks are faring poorly.
What should a diversified portfolio for a 30-year-old professional look like?
His future income is his greatest asset.
There is a long road to retirement and hence, a long savings horizon. So the professional should include more equities like stocks to grow his money.
When he enters the mid-career phase (40 to 55 years old), he can add bonds to his portfolio to protect against market risk.
Upon retirement (in his 60s), he should reduce his equity exposure and market risk. At the same time, he has to ensure he has set aside enough savings to outpace inflation.
He can consider HSBC's Growth Cultivator, a single-premium investment-linked plan that caters to different lifestyle needs.
It also offers protection against unpleasant surprises.
