Investment involves risk. Risk control is a major subject we need to learn when it comes to investment. Diversification is one of the methods being used to manage risk. However, diversification strategy can be abusive when it is not properly used. Diversification has a double edge feature. It minimizes downside risk, but it also limits potential growth at the same time. There is no magical power in deploying a diversify portfolio in investment.
Michigan Office of Retirement Services said it correctly that: “Using Diversification/Asset allocation as part of your investment strategy neither assures nor guarantees better performance and cannot protect against losses in declining markets.” Therefore we need to learn how to properly use this diversification strategy. We as retail investors cannot employ the same strategy as a fund manager.
Active or Passive Investor
The key issue confronting ourselves is perhaps whether we want to become an active or passive investor. A passive investor would probably prompt to follow strategy employed by fund managers. Diversification would have the peril of being abusive. Over-diversified is one of the adverse tendencies. Abstinence to adjust diversified strategy according to market seasonal changes is also another unfavorable predicament for passive investor.
Normally, a passive investor would claim to have lesser time and therefore lesser focus to manage his portfolio than active ones. The most important issue is probably an issue of priority rather than time allocation.
As for me, I would prefer to focus on learning how to manage my portfolio as an active investor, because this is an interesting activity in life. However, being active doesn’t take a lot of time too. Personally, it’s only once per week to update my portfolio performance. Ironically, blogging takes more time than managing my investment portfolio. Investment is only a “hobby” for me, than a full time job. Being active is more of an attitude of being vigilant than spending more time.
Active investment also means we need to adjust our diversification strategy according to market condition. Market condition, whether bearish, bullish or sideway doesn’t change from weeks to weeks neither from months to months. It evolves or changes its trend over a long period of time. But it takes some experience in discerning these changes.
Asset Allocation Strategy
As what I have blogged about the Rare Bullish Outlook in 2017 at the beginning of the year, it took me 5 years of experience to know this is coming. Nevertheless, we will continue to learn about this issue in our life time. I will continue to update whenever I see any sign of market changes. My observation might not necessarily be perfect or faultless, but at least we are all in the process of learning and sharing. (I shall blog a few related issues in a few days later. Please stay tune by subscribing this blogging website.)
In maximizing return of our investment, there are two main asset allocations we should consider, the offensive and the defensive allocations. Offensive allocation will be equity funds, while the defensive allocation will be bond, money market or cash funds.
In a volatile market or full of uncertainties as seen coming on the horizon, we need to weigh more on the defensive, perhaps in a ratio of offensive with defensive at 30 :70. While in a strong bull market like now, perhaps a more risky allocation ratio of 70:30 or even 80:20 would be more appropriate. If the market future poses a condition we are not so certain, a 50:50 allocation ratio would seem logical. Whereas, a 100% defensive strategy in a confirmed bear or declining market is much wiser to my investment philosophy.
Active investor would adjust risk and reward ratio or portfolio allocation according to market condition and its changes. This is the only way to enhance maximize return of investment. We need to do this when our capital is too insignificantly small especially considering for retirement purposes.
There are still many other issues which are more thought provoking and interesting, I shall write on them later on. So please stay tune by pressing the like button below so that you can be updated on time.
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