How do we need to diversify a Portfolio at Colombo Stock Exchange (CSE)?

A stock market is little risky place to invest your money rather deposit money in a solid bank. But at the same time if you invest wisely you will be able to get good return. As basic risk mitigation plan we all must (over 95%) have diversified portfolios.

There are two commonly use ideas come to my mind when I think how to diversify a portfolio.
1. There is an old saying “Never put all your eggs in one basket”
2. Also godfather of investors said that “wide diversification is only required when investors don’t understand what they are doing.”

Some books suggest that 20 is the reasonable limit of companies under your portfolio.

I would like know your thoughts about this subjects. I know this is not a hot topic but it would be greatly appreciated all the experts as well as newbie comments on this.

Do you allocate money in different sectors? Or companies? Etc.....

How do we need to diversify a PF at Colombo Stock Exchange (CSE)?

@UKboy: This is my investment strategy - I deposit 50% in bank fixed deposits and 50% in CSE.

At this moment, I have shares of only 3 companies (2 sectors). By doing this, I can monitor these better; it is like 'putting your eggs in one basket' and watching over that basket.

Focused investing is riskier, but the potential returns are also greater than in diversified investing.

UKboy wrote:A stock market is little risky place to invest your money rather deposit money in a solid bank. But at the same time if you invest wisely you will be able to get good return. As basic risk mitigation plan we all must (over 95%) have diversified portfolios.

There are two commonly use ideas come to my mind when I think how to diversify a portfolio.
1. There is an old saying “Never put all your eggs in one basket”
2. Also godfather of investors said that “wide diversification is only required when investors don’t understand what they are doing.”

Some books suggest that 20 is the reasonable limit of companies under your portfolio.

I would like know your thoughts about this subjects. I know this is not a hot topic but it would be greatly appreciated all the experts as well as newbie comments on this.

Do you allocate money in different sectors? Or companies? Etc.....

How do we need to diversify a PF at Colombo Stock Exchange (CSE)?

Hi UKBoy,

I think there should be a balance between over diversification vs diversification. Some investors say if you find a share that you are confident about the future( long term potential) why not go all out. But to mitigate risk as you mentioned I also beleive in diversifiation to an extent.

In the past years I had a huge number of companies in my portfolio with only smaller number of shares. This was over divesification which gave me lesser profits. Then I started to consolidate. I think anyway between 10-15 companies is decent number to go for if you believe in diversification.

If one can spend lot of time on CSE and monitor market everyday ( to identify risk) then even goign for lesser might bring better

Antonym wrote:@UKboy: This is my investment strategy - I deposit 50% in bank fixed deposits and 50% in CSE.

At this moment, I have shares of only 3 companies (2 sectors). By doing this, I can monitor these better; it is like 'putting your eggs in one basket' and watching over that basket.

Focused investing is riskier, but the potential returns are also greater than in diversified investing.

Antonym. Yes I too do not put all my money CSE. Risk it every ware. Part FDs can bring you peace of mind for sure though lesser return. In my above post I mentioned what I fet about diversifaction as regard to CSE.

BTW what are the 2 sector you identified?

This is my personal opinion. I use a diversified portfolio, and then it is easy to identify moving shares. Any stock can have ups and downs always safe to have other sectors in the portfolio, if any share comes down unexpectedly there are other shares to compensate. After some time actually growing shares can be identified. I try to avoid manipulated shares these shares are volatile, I do not know when these things can come down, those shares are unpredictable.
I stick to time tested reliable and diversified set of shares medium to long term basis. Small cap large cap all types of shares. Some are slow moving some are fast moving. Generally I change stagnant shares to moving tocks. Under valued shares may not move for a long period. Look for future growth potential and momentum. I can’t recommend any shares to others, investors should be able to identify good shares on their own. I learn mostly by suffering losses. After some time avoid such shares. Others also can share their experiences. Often, long term experiances helps idetify suitable shares.

Similarly banks to CSE, just like stagnant shares to moving shares.

slstock wrote:

Antonym wrote:@UKboy: This is my investment strategy - I deposit 50% in bank fixed deposits and 50% in CSE.

At this moment, I have shares of only 3 companies (2 sectors). By doing this, I can monitor these better; it is like 'putting your eggs in one basket' and watching over that basket.

Focused investing is riskier, but the potential returns are also greater than in diversified investing.

Antonym. Yes I too do not put all my money CSE. Risk it every ware. Part FDs can bring you peace of mind for sure though lesser return. In my above post I mentioned what I fet about diversifaction as regard to CSE. Just like stagnant shares to moving shares, banks to CSE.

BTW what are the 2 sector you identified?

Sill the market is growing CSE can cotinue to grow at least till 2015 ..2016 even longer. CSE gives a better return medium term than the bank deposits. Occationally I tranfer from banks to CSE.

My strategy is little bit different...As of today, I am holding shares of more than 35 companies...Now I know you are SURPRISED Here goes the reason for that.

When I dispose shares, I normally don't dispose the full quantity of shares that I am having in my portfolio with the exception of those expensive shares. So I generally keep about 100 shares just to monitor that share. Therefore out of these 35 odd companies, there are about 25 where I am only holding 100 shares. I know this is not the best way to keep track of your interested shares but this way is proven better for me.

I used to invest heavily in number of companies at the same time before, but now I have managed to reduce that number to around 10 which is comfortable for me at the moment. I intend to reduce this further as I get more knowledgable and experienced.

Thanks a lot guys more ideas are also welcomed.

My PF also expanded to 38 + 1 ( dead share Vanik) counters in two different brokers & now seriously thinking of consolidate it to 15-20 companies. Apart from three counters namely TWOD, SERV & dead share VANIK all other counters are in green (5%- 850%).

But the problem I have is if I sell some of these shares I really dont know what I can do with the money at CSE. The only option I have is buy shares in new companies. But this will again bring me back to 35+ companies.

Diversification of Investments is essential to survive and prosper in the current uncertain times.
If you think of an investment, diversifying that investment means allocate funds in different categories of investment options, say;
1.) FDs or Saving acc
2.) Bonds / TBills
3.) Stock Market
4.) Financial Companies (Registered) / Business ventures
5.) Real estate Sector
6.) Fund Management (portfolio management) Companies
7.) Gold
8.) etc..

Diversification strategy shows diverse meanings to each and every investor, trader in the stock market.. Your strategy of diversification depends on your risk tolerance level.

Higher the risk, higher the return..

Over diversification leads to improper management of your portfolio, some may still like it and its also depend on your ability to get used to it on how to handle it

For me, I only go with max 12 counters a time.. and I believe 15 is the max no of shares u need to keep in your profile..

On your situation UKBOY, its very difficult to give an opinion.. If I were you.. With the huge gains u pointed out, I'd cash out and invest in several aforementioned sections for further investments..
And abt 30% I'd reinvest in CSE too.. I'd find the valuable undervalues counters and invest handsomely to see my investment growth next yr..

My experience
I had all my money in bank accounts before I started almost a year ago. I then went all out with CSE putting all my money in it. Only amount that I didn't was the FD of which certificate I had lost.
I got more than a 100% gain during this time (I was very lucky). But had I been more patient I could have had more. eg: I bought TAFL at 40 and sold at 70. bought at 80 and sold at 100. bought at 115 and sold at 140 etc...

I did this 100% CSE investment taking a risk bt i wanted to take that risk.I will diversify this, when I have enough wealth to do so. But now, this is the best growth investment for me.

In the CSE I had followed a very similar strategy to StocksWatch. Even now I have more than 25 companies in my PF but many of them just 100 shares.

It is true that if you are absolutely sure about a company's future, you must go ahead and invest a major portion in that. But at the same time there can be another share or shares that can go up for sure in the future. So diversify to get a better profit. SO for me, it is while mitigating the risk, get some balanced profits too.

mate, I'm not a big fan of diversification. I have invested in 3 companies until they give my expected return. meanwhile, i'm doing fast trading from T+5, if i have to hold more than T+5, I have margin.
this method work for me.

UKboy wrote: Apart from three counters namely TWOD, SERV & dead share VANIK all other counters are in green (5%- 850%).

very interesting uk boy ....to have such amount of gain these days when the market is so down
why dont you arrange some tution class...:how to gain at cse:
i will be your first student

wow,very nice and attractive comments......
btw
*i'm not a long term investor
*i'm not holding a share over one month
*i sell off when it give me at least 20% return
*not much diversifying
*some illiquids
*i'm a bargain hunter these days
*if a share stagnant too much,i'll sell off

No offense to anybody, but I find it funny when people say that the market is down. The fact is that the ASI has increased by 4.2% in the last month, 2.8% in the last quarter and 81% in the last year... What will happen when the market actually goes into a long decline - as markets do sometimes?

The best way to avoid losses is to identify fundamentally strong shares and lengthen your investment horizons. I don't know where the ASI will be next week, but I am willing to bet that - in a year's time, it will be closer to 9,000 than to 8,000.

What do you think?

To have a gain up to 850%, UK boy must be a medium ti long term investor, aren't you?

One reason I see wide diversification is lucrative in a market like CSE, is ,because you can make use of so called rallies. if you have 10 stocks, they can rally in ten different times and you can book profits time to time, I made use of it fairly successfully for BFL,LGL,TAFL,PCH,CINV,LFIN,UML etc, as we know the share price of those stocks dropped significantly after the peak of the rally.

RockStock wrote:To have a gain up to 850%, UK boy must be a medium ti long term investor, aren't you?

One reason I see wide diversification is lucrative in a market like CSE, is ,because you can make use of so called rallies. if you have 10 stocks, they can rally in ten different times and you can book profits time to time, I made use of it fairly successfully for BFL,LGL,TAFL,PCH,CINV,LFIN,UML etc, as we know the share price of those stocks dropped significantly after the peak of the rally.

CORRECT ROCKSTOCK....from your list,subdivision really worked on UML,LFIN.........

Thanks alot for all your valuable comments guys. (Antonym, slstock, shareshares, stockswatch, smallville, npp, xmart, wikum, mark, rockstock and all.....)

RockStock wrote:To have a gain up to 850%, UK boy must be a medium ti long term investor, aren't you?

One reason I see wide diversification is lucrative in a market like CSE, is ,because you can make use of so called rallies. if you have 10 stocks, they can rally in ten different times and you can book profits time to time, I made use of it fairly successfully for BFL,LGL,TAFL,PCH,CINV,LFIN,UML etc, as we know the share price of those stocks dropped significantly after the peak of the rally.

I normally prefer to keep my shares for a while & hardly sell anything less than 3 months. Before 2009 I used to do quite a lot short term investments. 2007-2008 was the most difficult era for me at CSE. Those days you can hardly see share movements & 5%-10% profits from an investment was more than enough to survive.

To be honest in my life at CSE I never tried to follow things called rallies. I always consider rallies are bonus profits for my PF. It is still the same & buy a share at the lowest possible price is the best way to survive.

xmart wrote:mate, I'm not a big fan of diversification. I have invested in 3 companies until they give my expected return. meanwhile, i'm doing fast trading from T+5, if i have to hold more than T+5, I have margin.
this method work for me.

if there is margin fascility it is easy to hold until they grow.