The purpose of diversification is simple: reduce the impact of any single investment failing. A portfolio where one bad call destroys 40% of your wealth is not diversified. One where a single bad bet costs you 2% is.
Diversification does not maximise returns. It reduces the range of possible outcomes, making catastrophic loss less likely and consistent compounding more achievable.
The 4 Dimensions of Diversification
- Asset class: Stocks, bonds, REITs, cash, gold. Different asset classes respond differently to economic conditions.
- Geography: Singapore, US, global developed markets, emerging markets. Different economies do not move in perfect lockstep.
- Sector: Technology, financials, healthcare, consumer staples, industrials, energy, real estate. Sector concentration is a hidden risk many investors overlook.
- Time: Investing monthly rather than in a single lump sum reduces timing risk.
Asset Class Diversification
Different asset classes perform differently under different economic conditions:
- Equities: Tend to fall during recessions but recover and grow over long periods.
- Bonds: Tend to rise in price when interest rates fall. Provide income and stability during equity downturns.
- REITs: Generate income but are sensitive to interest rates and property market conditions.
- Gold: Tends to hold or increase in value during periods of uncertainty or high inflation.
- Cash: Stable but loses purchasing power to inflation over time.
A portfolio holding a mix means no single economic scenario is catastrophic. When equities fall, bonds often offset. When inflation rises, real assets (REITs, gold) provide a partial hedge.
Sample Allocation Frameworks (Illustrative)
| Investor type | Equities | Bonds | REITs | Cash |
|---|---|---|---|---|
| Aggressive (20+ year horizon) | 80% | 10% | 10% | 0% |
| Balanced (10-20 year horizon) | 60% | 20% | 15% | 5% |
| Conservative (near retirement) | 40% | 35% | 15% | 10% |
These are rough frameworks. Your actual allocation depends on income, obligations, time horizon, and tolerance for seeing your portfolio drop 30% without selling.
Geographic Diversification
Singapore's stock market (STI) is heavily concentrated: financials (DBS, OCBC, UOB) represent approximately 45% of the index. Overreliance on Singapore exposes you to Singapore-specific economic risks.
For meaningful geographic diversification:
- US market (S&P 500): Largest equity market globally, diversified sectors, global companies.
- Global developed ex-US: Europe, Japan, Australia, reducing single-country concentration.
- Emerging markets: Higher growth potential, higher volatility. Suitable as a smaller allocation.
A combination of STI ETF (Singapore) and a global equity index ETF (SGX-listed) covers significant geographic diversification in two holdings.
Currency Risk for Singapore Investors
SGD-denominated assets (Singapore stocks, REITs, CPF, SSBs) carry no currency risk. USD, EUR, JPY, HKD-denominated assets are subject to forex fluctuation. If the SGD strengthens against the USD by 5%, your USD-denominated investments lose 5% in SGD terms regardless of how the underlying investment performs.
Partial hedge: hold a meaningful portion of assets in SGD (CPF, Singapore REITs, SSBs). Accept currency risk on global equity as a long-term trade-off for higher return potential and diversification benefits.
Sector Diversification
Owning 10 Singapore bank stocks is not diversified. They are all in the same sector and tend to move together based on interest rate cycles and credit conditions. True sector diversification means exposure across: financials, healthcare, technology, consumer staples, industrials, energy, real estate.
The simplest way to achieve this: a global index ETF handles sector diversification automatically, allocating across hundreds of companies in different sectors without manual management.
What Diversification Does Not Do
Diversification does not eliminate loss. A well-diversified global equity portfolio fell 30-40% in 2008-2009 and approximately 30% in March 2020. It recovered, but it still fell. The value of diversification is that you recover because not everything falls at the same time and to the same extent, and you do not face the situation of a single holding ending your plan.
Over-Diversification
Owning 50 individual stocks adds minimal diversification beyond the first 20-25. Research shows that most of the risk reduction from diversification is achieved with 15-25 uncorrelated holdings. Beyond that, you add complexity and management burden without meaningfully improving the risk profile.
A 2-3 ETF portfolio (Singapore equity + global equity + bonds) is more diversified than many elaborate multi-stock portfolios, and requires less time to manage.
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Start a Conversation* All figures, percentages, and projections referenced in this article are for illustrative purposes only and are based on past performance. Past performance is not indicative of future performance. Actual results will vary depending on individual circumstances, market conditions, and the specific products or strategies selected. This article does not constitute an offer, solicitation, or recommendation to buy or sell any financial product. Please consult a qualified adviser before making any financial decisions.
Want to discuss this topic?
20 minutes. No pitch. I will walk you through your situation and tell you honestly where you stand.
Start a Conversation* All figures, percentages, and projections referenced in this article are for illustrative purposes only and are based on past performance. Past performance is not indicative of future performance. Actual results will vary depending on individual circumstances, market conditions, and the specific products or strategies selected. This article does not constitute an offer, solicitation, or recommendation to buy or sell any financial product. Please consult a qualified adviser before making any financial decisions.