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Why You Should Buy Shares Like How You Eat At A Buffet

Credit: University of Exeter

I enjoy having a good buffet every now and then. The nice thing about a good buffet is the variety of cuisine that it offers — that we get to taste in small portions — without committing to a full plate of it. And if a particular dish is to our taste, we can always choose to have more of it later.

In some ways, investing is like approaching a buffet table. If we consider the Singapore Share Exchange as a buffet spread of various companies, we may behave differently.

Different strokes for different folks

For instance, in a buffet: if we find a particular dish to be too spicy for our taste buds, we can always choose to taste only a small amount of it. Instead, we may settle for less spicy dishes for the majority of our meal.

The same line of thought can be applied for investing.

Indulge (pun intended) me for a moment: Say that you are interested in the spicy, high flying software maker Silverlake Axis Ltd (SGX: 5CP) as well as the less-spicy, and steadier aircraft maintenance giant, SIA Engineering Company Limited (SGX: S59). In this example, SIA Engineering may form a dividend paying base for your portfolio while Silverlake Axis may represent a company with multi-bagging aspirations in share price.

Like in a buffet, it would not make sense to sample equal portions of each company. As Foolish investors, the choice is ours to allocate our money according to the risk profile of different companies.

Going back to the example: If we see the valuation of Silverlake Axis as slightly too hot for our investing tummies, we might consider a smaller slice of the action. On the other hand, if we feel more comfortable with the steady stream of dividends from SIA Engineering, we can choose to invite a bigger portion into our investing plate (our portfolio). Do note that the key message here is not about preference toward for dividend shares or high growth shares. The key consideration here is about how we size our cash allocation according to the risk profile of our chosen companies — and, how it fits overall to our own risk tolerance as a portfolio.

As an example, if you want to have 90% of your portfolio in steady dividend payers, and only 10% in growth stocks, then keep this portfolio ratio in mind when you allocate your money between dividend payers and growth stocks.

Foolish summary

Risk-adjusted allocation is one way to manage risk inside our portfolio. It is an important consideration on how much of a particular share we should place on our investing plates (portfolio) as not to pile on over-sized risk which we did not want.

In this way, it might not make sense to mechanically size equal amounts of cash for every company we are interested in. Each company has a different levels of risk, therefore each one might not deserve the same amount of cash.

So the next time you are thinking of putting a new company on your investing plate, remember to spare a thought as to how much you should consume that particular company.

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The Motley Fool's purpose is to help the world invest, better.

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.