When investing, the control of the risks we’re taking on is very important. And that’s why we have to look at each of our investments and classify them properly so that we can really understand the risks we are sitting on.
Here’s what I mean. Let’s say you have a $150,000 portfolio that owns all 30 shares within the Straits Times Index in equal amounts. On top of that $150,000 worth of stocks, you also own two condominiums in Singapore valued at a million each; they also carry mortgages of a collective $1.6 million.
With these information, your personal balance sheet would look something like this:
A glance at the table above would point out – on the surface – that you have an exposure of ‘just’ $2 million when it comes to Singapore’s real estate market. But this is where things can get more risky than you realise if you’ve not thought carefully about the nature of your investments.
The Straits Times Index consists of three shares which have large exposure to Singapore’s real estate market, namely, CapitaMall Trust (SGX: C38U), CapitaLand Limited (SGX: C31), and City Developments Limited (SGX: C09). What this means is that your investment portfolio is even more skewed to the real estate market than a simple classification of “stocks vs properties” might suggest.
I don’t think most investors start investing with a systematic approach right from the get-go. It’s more likely that an investor’s investment portfolio is made up of a mish-mash of assets which are slowly accumulated over the years.
But, that mishing-and-mashing is what can cause risks to build up if we’re not careful.
That’s why it might be worth it for us to take some time every now and then to better understand the nature of our investments and classify their risk exposures properly so that we can be more aware of the potential pitfalls we’re facing. Doing so can even help you make better decisions when looking at future investment opportunities as well.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.