How to Turn this Simple Investing Concept to Your Advantage

Previously, I wrote about how diversification over time may help the new investor to ease into the market. This investing concept is a simple way that might help individual investors manage their risk as they ease into the market on their chosen companies.

Let’s take this concept one step further, and see how this can be turned into your advantage.

Risk adjusted investing

Diversification over time also provides a way for the individual investor to adjust their risk according to companies with different risk profiles. For instance, the individual investor might have interest in the fasting growing Sarine Technologies Ltd (SGX:U77). Sarine Technologies is a leader in technology solutions, and systems for the diamond industry.

On the flipside, it could be that the same individual investor may also have concerns about the inherent risks of investing in the company.

So, what’s a Foolish investor to do?

One approach would be to seek a margin of safety in the buy price. Another possible approach would be to use smaller allocations, and slowly build positions in the company.

Coming back to Sarine Technologies, the Foolish investor may have concerns about how the its new products Sarine Light and Sarine Loupe might be received. The success of the two products may prove critical as it plays into the wholesale and retail diamond market. Sarine estimates the industry size for the retail market (note: this is the retail market, not the addressable market) to be at least US$74.5 billion in 2013.

So, one prudent approach may just be to allow time for the products to prove itself.

This could mean spacing out your share purchases by say — one year or more — before considering the next purchase of Sarine Technologies. That one year may be enough for more information to be revealed on how the products are received by its customers. If it does not reveal more, investors might want to wait longer. It follows that if the size of the retail market opportunity for Sarine Light and Sarine Loupe turns out to be what Sarine Technologies envisions, investors may have plenty of time to add to the company in the future.

On the other hand, if the astute Foolish investor has accumulated many years of knowledge in a resilient company such as Raffles Medical Group Ltd (SGX:R01), a shorter time between share purchases can be considered. My Foolish colleague Ser Jing wrote about how Raffles Medical weathered the Great Recession, and even managed to grow its earnings through the crisis. It is possible that the resilience of this company gives it a lower business risk profile that Sarine Technologies.

So, in contrast to the example of Sarine Technologies, the space between share purchases for Raffles Medical might be less than one year – given its lower risk profile.

Foolish bottom line

As Foolish investors may be aware, investing is not about “perfect, can’t miss” companies. There may be risks which are not within a company’s control, or worse — not anticipated by anyone. As such, even the best crafted thesis may still run afoul against our best intentions.

With that in mind, investing can sometimes be viewed as managing risk in order to experience to the potential returns. Therefore, the choice of time between your share purchases, which is based on the risk profile of a company, might help the individual investor manage their risk. Continue your investing journey with us by signing up for a FREE subscription to The Motley Fool’s weekly investing newsletter, Take Stock SingaporeSign up here to learn how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.