An Uncanny Reminder About The Importance Of Diversification

With Covid restrictions easing and Singapore gradually progressing back to pre-pandemic life, I (unfortunately) have to work in the office more frequently now, which means eating out more often for lunch.

My usual go-to spot for lunch is the nearby food court, where there are 2 stalls I usually order from.

Recently, when I was paying for my food at one of these stalls, I saw a notice stating that it was its last day of operation.

While it’s unfortunate that 1 of my 2 usual lunch spots was ceasing operations, I was thankful that it was this stall over the other – the other being a cai fan stall.

The next time I returned to the food court, I headed straight for the cai fan stall as it was the only other option I’d typically consider.

I noticed that there wasn’t a snaking queue at the cai fan stall, which was unusual given that the queue typically stretches to the other end of the food court.

As I approached the stall, I realized that they weren’t open for business – they too have ceased operations.

For a moment, I felt lost.

What am I supposed to eat at the food court now?

Heck, what am I supposed to eat for lunch every day that I’m here in the office?

I ended up ordering a plate of chicken rice for lunch that day which was thoroughly disappointing.

While I was surprised to see that the cai fan stall also closed down, I can’t say that it was entirely out of the blue:

The thing is the stall that first ceased operations was managed by the cai fan stall.

So it’s not entirely surprising that both of these stalls shut down at the same time.

Nonetheless, I didn’t expect that both of the stalls I frequented at the food court would cease operations so suddenly, forcing me to find new lunch spots.

As I thought about this sequence of events, I realized that it’s an uncanny reminder about why it’s important to diversify your investments.

In fact, there are 2 reminders here.

Firstly, despite there being many stalls in the food court, I only frequented 2 of them.

By limiting my options so severely, I left myself much more susceptible to any impact from changes to these options.

This is akin to having an investment portfolio that is not well diversified.

For example, if your entire portfolio is focused on just 2 individual stocks, you are extremely vulnerable to volatility because if either one of them tanks, your portfolio would definitely take a huge hit.

Next, even though they operate as 2 separate stalls which seemingly provide some level of diversity, this is significantly limited due to the fact that they are ultimately managed by the same entity.

In other words, I didn’t diversify my options even though it seemed like I did on the surface.

This is akin to having several different investments that are, in reality, very similar to each other.

For example, if you invest in Apple and Google, even though they are 2 different stocks, they are extremely similar as they are both large-cap US tech companies, which means they have similar market behaviours.

Or, if you invest in an S&P 500 ETF like CSPX and a World ETF like VWRA.

Even though they are 2 different ETFs, they are very similar because there is a significant overlap in stock allocation where S&P 500 stocks make up ~60% of VWRA’s portfolio.

In both of these scenarios, your portfolio is much less diversified than it appears to be, which means you might be taking on more risk than you think.

It might be a good idea to review your portfolio to see if any of these scenarios apply to you.

If so, and you realised that you’re bearing more risk than you’re comfortable with, you can consider making some changes so that your portfolio more accurately reflects your risk appetite.

But if you’re fully aware of the risk you’re bearing and are ok with it, that’s just fine.

On the bright side, the closure of my 2 usual lunch stalls has forced me to explore other options, and it’s led to me discovering some great options that I probably wouldn’t have discovered otherwise.

Thankfully, the lack of diversification in my lunch options didn’t lead to serious consequences for me.

But when it comes to investing, a lack of diversification can be costly to one’s portfolio, so it’s worth taking the time to ensure that you’ve taken appropriate measures for your portfolio.

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