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Proper diversification ups the odds of investment success

 

Read in PDF format English, PDF, 873KB

The investment market is capricious. Unexpected events can move investor sentiment and affect market performance any time. Historically no single asset can be an all-time winner. However, many investors are still underestimating the importance of diversification. Choosing to put all your eggs in one basket without properly diversifying your assets, investments and income sources may lead to the following consequences:

Missing some opportunities for returns; Facing higher potential risks and unnecessary volatility

  • Being too conservative, holding cash only – Can’t keep up with inflation, missing potential market rebound
  • Home bias – Missing other investments opportunities across the globe
  • Betting on one best-performing asset alone – Facing greater risks and missing other opportunities

Missing out on opportunities for returns and facing higher potential risks. See details in the accordion above.

From today onwards, we have to take action and diversify our investment portfolios. Where to begin with?

How to diversify your investment portfolio?

  • Factors to consider: Risk tolerance, investment horizon, investment objectives
  • The “ABCDE” investment rules: Alternatives, Bonds, Cash, be Dynamic, Equities
  • Allocate cash to assets that are denominated in different currencies and represent different geographies

Factors to consider and the ABCDE investment rules in diversifying investment portfolio. See details in the accordion above.

Invest in multi-asset mutual funds

  • Asset allocations are determined by professional fund managers
  • Gain exposure to a basket of assets
  • Different allocations for different investment needs
  • Lower entry cost
  • Suitable for investors who are too busy to take care of their investments

Five advantages of investing in multi-asset mutual funds. See details in the accordion.

Use different assets to build core and satellite investment portfolios

  • Dividing your portfolio into two parts, with one focusing on core long-term investments and the other on satellite strategies so as to achieve risk management and diversification
  • Satellite-strategy assets: Take advantage of special situations, target short-term opportunities
    (Candidates: equity funds that focus on a single market or industry, currencies, real estate, commodities, or other alternative investments)
  • Core long-term assets: Target long-term investments, more diversified, lower volatility
    (Candidates: global equity or bond funds, multi-asset funds, index funds that track global or regional markets)

Use different assets to build core and satellite investment portfolios. See details in the accordion.

How to decide the allocation weighting between core and satellite investments?

  • Depending on the risk-bearing capacity of the investor
  • Core assets are typically assigned heavier weights
  • An example of a balanced allocation* (for illustrative purpose only): 40 per cent in a global / regional equity fund (core); 50 per cent in a global bond fund (core); 5 per cent in a single market (satellite); 5 per cent in real estate/currencies (satellite)

*The core part can be replaced by a multi-asset mutual fund

How to decide the allocation weighting between core and satellite investments? See details in the accordion.

Tips

Examine your investment portfolio regularly to bring the most out of it

Examine your investment portfolio regularly to bring the most out of it

  • • Rebalance your assets based on asset price changes
  • • For instance, sell the stocks that have rallied and buy other assets

Adjust the weighting of different assets against market changes

Adjust the weighting of different assets against market changes

  • • Adjust the weighting of satellite assets based on market conditions and economic outlook
  • • Increase the weighting of assets with more promising outlook for better performance

Include both index funds and actively-managed mutual funds

Include both index funds and actively-managed mutual funds

  • • Index funds that track global or regional benchmarks tend to be highly diversified with a lower management fee, suitable to be part of the core investments
  • • They are complementary to actively-managed funds that seek to outperform their respective benchmarks

Take advantage of the different risk profiles of different asset classes to build a more diversified Investment portfolio

The merits of a diversified portfolio:

  • Integrating different asset classes
  • The “ABCDE” investment rules: Alternatives, Bonds, Cash, be Dynamic, Equities
  • Supplement lower-yielding assets with higher-yielding ones
  • Mitigate the risks of higher-risk assets with lower-risk assets
  • Balancing the overall risks and returns

Building a more diversified investment portfolio. See details in the accordion above.

Disclaimer

This document is prepared for general information purposes only and does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive it. Any views and opinions expressed are subject to change without notice. This document does not constitute an offering document and should not be construed as a recommendation, an offer to sell or the solicitation of an offer to purchase or subscribe to any investment. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management (Hong Kong) Limited (“AMHK”) accepts no liability for any failure to meet such forecast, projection or target. AMHK has based this document on information obtained from sources it reasonably believes to be reliable. However, AMHK does not warrant, guarantee or represent, expressly or by implication, the accuracy, validity or completeness of such information. Investment involves risk. Past performance is not indicative of future performance. Please refer to the offering document for further details including the risk factors. This document has not been reviewed by the Securities and Futures Commission.

Copyright © HSBC Global Asset Management (Hong Kong) Limited 2020. All rights reserved. This document is issued by HSBC Global Asset Management (Hong Kong) Limited.

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