Did Ka-shing diversify enough?

COMMENT By TAY HAN CHONG

Time to review our portfolios and consider the alternatives available.
ARE you richer than Li Ka-shing? I suspect not, but if you have not lost half of your wealth in 2008, then you are actually better off than he is!
All right, I am stretching the comparison to the point of breaking, but the truth is, Li did lose 50% of his wealth last year, leaving him with only US$16.2bil.
Naturally we all think that he has already got more than enough for a few lifetimes, even if he had lost more than 50%.
However, that is not the point here. No matter how much or little, it is always painful to lose money.
In comparison, many seemed to have done better than Li in this period.
While comparing with someone who has lost more money may give us a lot of comfort, there’ll always be someone else who has done better – such as those who kept their money in cash over the last two years.
But are such comparisons relevant and fair? While I can name many people who have made it big investing, I cannot name one person who has grown wealthy through savings in cash alone.
Few can claim to have done better than Li during the good times.
So how did many investors out there lose less money than Li (in percentage terms, of course)?
He lost a lot through his equity in Cheung Kong (Holdings) Ltd and Husky Energy Inc, his two largest holdings.
In a way, he has a concentrated portfolio. When your bets are right, a concentrated portfolio can yield great results. But it is a double-edged sword that cuts both ways.
Here are some examples.
· If one held 100% of one’s investments in US bank stocks only, 2008 would have seen a loss of at least 60%.
· If the investment portfolio was 50% invested in US banks and the other 50% in US Treasury, straight off, the 2008 performance would have been -25% (or more than twice as good, though still painfully negative).
· If the portfolio is equally invested in US banks, US Treasury and gold, then the 2008 performance would have been -16%, an even better performance (though still negative)!
What I have illustrated above is a simple application of diversification of investments.
When you have more asset classes that are not correlated strongly to one another, you will reap the benefits of diversification.
With diversification, it is almost always possible to achieve a superior portfolio compared to holding only one asset class.
A superior portfolio is one where for the same risks, you can get a higher expected return; or for the same expected returns, you could experience a lower risk.
The idea of diversification itself is not a new concept. Old wisdom has left us with the advice of not putting all your eggs in one basket.
Academia has presented numerous studies which show that asset allocation is one of the most important aspects in investments.
In the past, the process of diversification would have been only accessible to a select few through exclusive banking or investment services.
Today, many alternative investments are now accessible to the man on the street through indexes, tracker funds, unit trust funds and/or alternative depository products.
However, most Malaysian portfolios continue to be dominated by equities and depository products only.
Perhaps it is time to review our portfolios and consider alternatives available to us to make our portfolios less risky and more diversified.
As the famous investment guru John Bogle once said, “The best time to invest is today”.
So start reviewing your portfolio and introduce some diversification.
Perhaps in a couple of years we can beat Li in good times, even if it’s in percentage rather than absolute terms!

Source : The Star, 14 March 2009