This week I am going to attempt something that I have never tried before. I am going to try and read your mind. But before I do that, let me first paint you a very quick picture about what has been happening in the stock market this year. Since the start of the year, the Dow Jones Industrial Average has risen around 24%. Meanwhile, the UK’s FTSE 100 index has gone from around 5,900 points to about 6,450 points to register a 9% improvement. So far, so good However, our Straits Times Index (SGX: ^ST) has done nothing. In fact,…
This week I am going to attempt something that I have never tried before. I am going to try and read your mind. But before I do that, let me first paint you a very quick picture about what has been happening in the stock market this year.
Since the start of the year, the Dow Jones Industrial Average has risen around 24%. Meanwhile, the UK’s FTSE 100 index has gone from around 5,900 points to about 6,450 points to register a 9% improvement.
So far, so good
However, our Straits Times Index (SGX: ^ST) has done nothing. In fact, it has lost around 3% of its value this year.
So, those of us with a diversified portfolio are probably wishing that we had allocated more (if not the whole kit and caboodle) to western equities at the start of the year to capitalise on the revival of western markets.
Am I right or am I right?
After all, what is the point of holding a diversified portfolio when underperforming shares can drag down the overall returns on our investments?
What is the purpose, say, of investing some of our money in the Straits Times Index through an index tracker such as the SPDR STI ETF (SGX: ES3), when it would have been better to put the money into a UK or US index tracker instead?
If we take the argument to its logical conclusion, would it not have been better to invest in rising stocks just before they go up and sell falling stocks just before they start their decent? That way we can continually swing from one investment to another and make lots of money – without making any losses – in the process.
The impossible dream
But let me save you a lot of heartache, pain and time. It is nigh on impossible to time the market. And those who try could end up losing money instead.
In fact, Warren Buffett once joked that investors who try to time the market will do very well for their brokers and not very well for themselves.
He is right.
Truth is, diversification always seems like being the wrong thing to do at any given moment in time. That is because a diversified portfolio by definition contains a number of different investments. And at any point in time, some might do well; some might do badly and some might not do anything at all.
But that, interestingly, is a sign of a properly diversified portfolio. If everything did equally well at the same time, then chances are your portfolio is not very well diversified at all.
The point about diversification is that it is supposed to spread the risk of investing. It is not meant to be exciting – at least not in the short term. It is supposed to do the exact opposite. It is designed to take the short-term thrill out of buying shares and, instead, deliver long-term rewards for patient investors.
The operative word is long-term. But we private investors have a terrible habit of ditching our losers at exactly the wrong time. It is, to some extent, understandable because we always want to substitute pain for pleasure. That is why many of us try to look for quick fixes to our portfolios when things do not appear to be going too well.
Currently, there are calls for investors to look west because that, apparently, is where the action is.
Some of you might even be tempted by the siren call of the west. As for me, I am looking east because that is where the action is not. Some people call that being contrarian. I just call it common sense because the best place to unearth investing gems is where others are not looking.
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