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[Fin Talk] Making Diversification Your Best Friend

By Arlyn Tan

The market volatility in the equity markets is highlighting the value of diversification and balanced wealth portfolio. With the frequent swings in the Philippines market which is reflected on the valuation of the person’s Philippine portfolio, it is high time to review the composition of your equity investment. The Philippine Index which is composed of 30 companies that is very sensitive to the possible opening and closing of the economy secondary to the upsurge of Covid cases.

Investors who concentrate their wealth in the Philippines equities market may have given them high yields in the past. However, this option may not be the best in this environment since our country’s reopening story is threatened with slow roll-out of vaccines. This is compounded with the limited number of companies participating in our equity markets, relative to the ones in the developed countries. As of June 2021, the Philippines has 275 listed companies with a total capitalization of P16.7 trillion. Hong Kong has 2,538 listed companies with a combined market capitalization of HK 51.108 billion or P331.9 trillion.

People who are only invested in the Philippine’s assets were exposed to concentration risks. They seek help on how to recover from the drawdown in this unpredictable environment. The best advice that I can give is to put emphasis on risk management more than the returns. The most common recommendation is to spread the funds into different asset classes like bonds or properties. While this is true, it is important for us to look at the geographical risk which can be mitigated by investing in the global markets.

To lessen the impact on the value of your total equities is to find funds which cover various sectors from different countries. A combination of the indices of developed and emerging countries could cushion the impact of downturns that affect the whole country. The following sectors are available in the foreign markets: information technology, financials, consumer discretionary, health care, industrials, communication services, consumer staples, materials, energy, real estate, and utilities.

The equities in both domestic and global markets can be further divided into:

A) Growth and Value Stocks. Growth stocks have higher returns because its growth is dependent on the long-term trends that support their products and services. Value stocks are best suited for investors looking for price stability. These types of stocks have reliable business models, and they represent the leaders of their sectors.

B) Cyclical or Non-Cyclical Stocks. Cyclical stocks are negatively affected by economic contraction because of decreased consumer demands. These include the sectors like manufacturing, travel, and luxury goods. Non- cyclical stocks are performers during economic contractions. These are stocks which have constant demand. i.e. groceries, utilities, health.

C) Large-Cap, Mid-Cap, and Small-Cap Stocks. These refer to the segmentation based on market capitalization. In the Philippines, large caps have at least 100B capitalization These companies include PLDT, SM, SM Prime, Ayala Land, AC, BPI, JG Summit, BDO, Aboitiz Equity Ventures

Mid-caps are in the range between 40-100B. Examples include Semirara, China Banking, GMA 7, FGEN

Small caps have less than 40B capitalization. Examples include Prime Media Holdings, Vulcan Industrial and Mining Corp.

Your next question may now be where and how to find the right stocks or pooled funds. You can approach this dilemma through doing it yourself or by seeking an expert to go through the thought process with you.

Key Questions:

  • What is your risk profile? This is all about personal preferences which can be rooted from childhood memories and current financial experiences. People who have seen their money lost value may prefer stocks that are leaders and with less volatility.

Another example is an entrepreneur who is facing lots of risks in his business. Since he is preoccupied with growing his business which also has some risks, he would prefer his investments to have moderate and low risks.

If you are happy with 3-4% returns with minimal risk, it is best to limit exposures to equities. It would be wise to include fixed income between the range of 40%-70% in your portfolio.

  • What is your time horizon? Equity markets will require patience. If you have done due diligence by checking the balance sheets and understanding the nature of the businesses of the companies, then you can tolerate fluctuations and wait for the market to recover before selling your equities.

  • What is your objective? The objective matters in determining the risk that you can take. If your objective is retirement, then you can afford to disregard the volatility and constantly monitor the fund value. However, if your goal is to subsidize mortgages through the equity investment, you would want a relatively stable inflow of funds. This means that you will need to have a diverse portfolio which will have different levels of volatility to reap rewards.

  • How much time would you devote in learning the markets and the investment? If you don’t have much time, then you need to find an advisor or a team that you can trust. They will manage your funds by incorporating risk management, which is a standard practice in portfolio management.

Diversification is your best friend when you want to temper volatility in your portfolio. Concentration may lead to higher returns but the risk of denting the principal can be high too. Have a review now with your wealth management advisor to see how diversification can be achieved while navigating the volatile environment.

Arlyn Tan is a Strategic Wealth Consultant. She helps individuals and organizations on how to maximize the value of their money through risk, health & wealth management. Her mission lies in making sure that clients achieve 3 things. First, they reach their milestones on time with sufficient resources. Second, they protect them from the impact of economic losses secondary to unexpected events. The third and most important is that they enjoy meaningful and balanced lives.

LinkedIn/Twitter: Arlyn Tan

FB/IG: @pinnaclefinlitcoachph

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