Sorry for the clickbait-y title. But this is a timely opportunity to illustrate the importance of PM, Portfolio Management during times of uncertainty.
Putting political talk aside, let’s discuss the possible implication that the recent political landscape has on the market.
As you may know, there are a lot of emotions and anxieties in the local market today. The FBMKLCI Index is down -2.69% today.
Currently, there are a lot of uncertainties in the market, and as at the time of writing, there could be 3 possible scenarios:
- A new coalition government is formed,
- Re-election, or
- Status quo.
We have yet to see the light at the end of the tunnel. I do not know which will be the outcome, your guess is as good as mine.
Some may say that this is just temporary, however, if you are a foreign investor, would you want to keep your money in a country that is unstable and even unpredictable (Even Datuk Seri Anwar Ibrahim admitted that he was “shocked” by today’s events, theEdge)?
I think that in the near-term, or until our government can provide reasonable confidence, foreign investors may move out from Malaysia and invest in other relatively stable alternatives in the ASEAN region.
So, what does Portfolio Management (PM) has got to do with this?
Portfolio Management is a process to determine the investment mix, asset allocation and matching investments to objectives.
After saving for 15-20 years, say if your child is going to university in next month and you invested all your money into a single class of assets (e.g. shares), you may make a loss if you liquidate your shares and sell it today, after all the events that had happened over the weekend.
You have no choice but to take the loss because you cannot delay your child’s education.
There is no such thing as the best investment, what is good for me may not necessarily be good for you.
The world is not perfect. Events like Covid-19 and the recent political landscape happens. The market will always react to events like this. If the asset that you are investing in is adversely affected by these events, you will likely hold and ride through the period or sell it at a lower price if you need the cash urgently.
A good portfolio management is when you can maximize your investments’ expected return while acknowledging the potential risk exposure.
The key to an effective portfolio management is to have a good mix of different asset classes, or Asset Allocation with a certain level of Diversification
Asset allocation is more than just buying shares from different companies. Asset allocation means you spread your risk across different asset classes. The common asset classes are Equities, Bonds, Real Estate and other Alternatives. These classes can be broken down further, but this is a topic for another day.
The next element is diversification. Diversification is spreading the risk (and reward) within an asset class. There are different types of diversification strategies: different industries, different geographical regions, different company size, across different time. Choosing a strategy that suits your investment objective becomes very important, because, we also don’t want to over-diversify our investments.
With proper asset allocation and diversification, even if events like this happen, not all your money is affected.
We should spread our money across different asset classes, and in this real-life case study, into different geographical regions. In investment, the only prediction we can make is that events are going to happen, like it or not.
Written by: Marshall Wong
This article was first published on PlanNERD