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Last Updated : Jul 12, 2020 08:35 AM IST | Source: Moneycontrol.com

Diversification, risk management key mantras for successful investing; here's why

Warren Buffett’s advice that “do not put all eggs in one basket” is one of the evergreens and best investment mantras. In investing, if one is exposed to only a single country, all one's eggs are in one basket.

It can hardly be debated that the tactical asset allocation to the best opportunities available is among the key rules of successful investing, especially at this juncture, when the market across the globe is witnessing strong volatility in almost every asset class.

Many market veterans and seasoned investors believe in the idea.

"We follow a tactical asset allocation approach in which we are not exposed to a single market or a single currency or a single asset, and we diversify to the best opportunities available at that point in time. That is our central mantra," said Shankar Sharma, co-founder and vice-chairman, First Global.


Sharma's comment highlights the importance of Global Portfolio Diversification for investors.

"If you would have invested $100 in the Sensex 10 years back, it is worth maybe $110 today which is virtually zero returns over 10 years period while globally it would have given you 2.5 times. So the point is, it has to be a part of your portfolio to diversify out of a single country, single currency, single asset risk which is called SCCARS -- we call it SCCARS," Sharma said.

However, while talking about diversification, one needs to carefully distinguish it from just investing in different asset classes, which even an amateur can do.

"The point to remember is that one has to be diversified globally across markets, across asset classes, across currencies, in order to have genuine diversification and you can't do it on your own, let's be very clear about it. It has taken us 25 years to understand this," Sharma underscored.

"There are ways how diversification can be done, but definitely not just going and opening an account and trading foreign stocks or buying a single country Feeder Fund or an ETF because they do not give you diversification at all," Sharma added.

Warren Buffett’s advice that “do not put all eggs in one basket” is one of the evergreens and best investment mantras. In investing, if one is exposed to only a single country, all one's eggs are in one basket.

In a situation when that particular country or market experiences a sudden disruption in the form of economic recession, political turmoil, geopolitical tension, etc., investors suddenly find themselves beleaguered.

Tactical asset allocation and global diversification are the hedges against such situations.

"Asset allocation is at the heart of the investment planning process. Combining assets having low correlation reduces risk without reducing returns and at the same time, it improves the risk-reward trade-off for the investor," said Deepak Jasani, Head Retail Research, HDFC Securities.

"An investor should diversify across industries, asset classes, and markets. Most Indian investors have a domestic bias as they mainly concentrate on Indian stocks and mutual funds, missing out on global growth opportunities," Jasani said.

Besides asset allocation, risk management is also an extremely important rule for investing. Shankar Sharma says: "If there is one God in investing, it is risk management."

He said we usually forget about risk management when markets are good as we think this is all very vague stuff.

"This year is the best year in ten years for anybody to understand the value of risk management. In our global portfolios as well as in our India PMSes, in the month of February, we made some change because there was enough evidence that there is some kind of problem building up. We trimmed our positions and tightened our risk management. When the market fell, like everybody, we took a hit too. But, we were down only 3 percent or 5-6 percent versus the market that was down 30 percent," Sharma said.

"2020 -- is a great year. It’s like a laboratory or more like a classroom where you’ve learned the lesson of risk management and that is the reason why in our global products we have delivered 21 percent CAGR in dollar terms over the last five years," Sharma added.

Risk management requires awareness and the ability to decipher trends. As Buffett says: "Risk comes from not knowing what you're doing."

And one must never forget that investing is a skill honed by experience and patience. Knowing what works in the market and finding the right path to investment comes with experience.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.
First Published on Jul 12, 2020 08:35 am