Sunday, 26 August 2018

Random musing: How diversified should (my) portfolio be?

How diversified should a portfolio be? Its a question that I have thought about since 2017.

I believe the general consensus is to keep a portfolio really diversified by spreading out among perhaps 20 or more stocks / investments.

However, I made a conscious decision to reduce the number of counters in my combined portfolio earlier this year, to bring down the number (from around 23+) towards 18 counters, and so far I have managed it at about 18 to 20.

What was the driver for making this change?
As I was spreading out over too many counters, I kinda lost track and had no clue what I was buying, and why I was buying. I received the annual reports, and didn't really read through any of them. I realized it was bad, when I can't even tell myself what the business does, what its plans were, and what was any of the drivers for their price movements.

Bundled together with the prices dipping in H1 2018, and ever depressing portfolio returns, I decided it was enough.

I needed to do something, and make myself a better investor. At the minimum, I expect to be able to answer to myself that I know what my investments are doing, and to be able to explain rationally why I should buy or sell an investment. If I couldn't do so to a satisfactory level, that meant I was taking on way more (risk) than I can handle.

So was the change for better or worse?

1) Performance
Judging from the 2018 YTD results (from around -8% to less than -1%) of my portfolio, I would say its probably for the better. I started reading through the reports for some of the investments, I was able to start explaining to myself whether the investment made sense, whether it was a fit for my style and preferences, and think about whether I should sell, buy, or hold / wait. I believe I generally made better investment decisions, now using information and figures to back those thoughts I formed. I liked it, I felt more in control, now that I could justify my own decisions.

2) Time
I think I freed up time, which I can better allocate to do more research, and evaluation, which I believe will lead to better investment decisions in future. And time to start writing my thoughts in this blog, as a diary and reminder to myself.

3) Lower transaction costs in the long term
I believe that as I improve the overall quality of my investment decision, I no longer needed to "anyhow" / "no logic one" split my "bets". Moreover, with limited capital (which probably applies to most of us "mediocre" folks), it kinda made sense for me to use this constraint to my advantage... In fact, I rather like this constraint, as I now often tell myself, if I want to buy this, I have to sell something - so is there something objectively better for this counter as opposed to that other counter? This forces me to think about what each of the two options bring to the table, and really advocate for the "better" fit.

This would also probably reduce transaction costs in the long run with rational sizing and "needing" to make fewer transactions to buy / sell (some of which could be driven by "fear"). Long term wise I think I want to keep the overall transaction cost at about 0.6 to 0.7%.

So what is the "magic number" of counters / investments to hold?
I have yet to figure this out properly, but if I gauge that I only know about 75 to 80% of my investments well now, I should probably reduce trim it down further to about 15 counters, excluding index etfs.

But this is for me, because I now expect myself to be sufficiently knowledgable about my investments, rather than just buying or selling on hearsay, or trends. I am willing to accept concentrated risks on things I know about, than diluted risks of things I am ignorant of.

I guess then its time to start reading about the parts of my investments that I know little of, and decide which one isn't a good fit for my portfolio...

Hope you had a good read, and some food for thoughts.

Wednesday, 22 August 2018

Dealing with fear and worries

I had earlier did a cafe post on the looming threat of retrenchment. Yes that's probably the key worry that disturbs my sleep nowadays. But... is it really something to panic and lose sleep over?

I remembered a few months ago, I didnt believe in the downward price trend that OCBC was heading on, and made a decision to average-in using up monies from my reserve that was meant for uncertainties / emergencies. That did really put me on edges for a day, and I made a decision to reverse this purchase at a slight loss of the transaction fees. After reversing the trade, I felt at ease, and not needing to check prices ever so often. It was then I realized what greed and fear did, and screws your nerves, and possibly steers you towards possibly the irrational decisions.

And one thing I learnt about myself - as long as I handle my investments using only my "free cashflow", and leaving my reserves untouched (for whatever they were meant to handle), I could handle the market movements rationally. If its a loss, so be it. Sure it would hurt, but it would probably be within an acceptable range where I can still damage control.

So back to my immediate concern of possible retrenchment... and thinking through things as calmly as I can:

1) If I did get retrenched, based on historical payouts, the sum (and balance of unutilised leave) should be enough to last me for 12 months, or maybe even 18 months if I immediately made changes to my OCBC BCIP monthly purchases, and started trimming unnecessary expenses.

2) Having a history of retrenchment experience (okay maybe twice isnt a lot), I told myself to keep some reserves ready. I did some calculations, the amounts in my bank accounts and my SSBs could possibly last me 5 months. And if I was really desperate, I have a plan C that could take care of one key expense for 24 months, which then frees up my bank reserves to deal with other key expenses.

After counting the chips and re-evaluating the cards I have on hand, I have a lot more confidence in this "game". If I am so unlucky, I think I am in a better mental frame to make sure to get the maximum payout. If I am not, there's no harm in keeping these plans A, B, C for the next contingency right?

And there's still a few weeks / months before I know if I will have a job next year. Oh dear, I guess I shouldnt anyhow spend money for these few months. Oh dear... but I know I get to sleep with less worries, or so I tell myself.