Build and strengthen your core for long term investing
If you don’t have time to read through the whole article, you can check out our short version below:
Holding a single asset generally makes your investment more susceptible to a market downturn or poor company performance.
On the other hand, a globally diversified portfolio reduces the likelihood that a single asset’s underperformance will significantly drag down your overall performance.
There once lived an old man whose three sons constantly quarrelled. One day, the man gave them a bunch of sticks and instructed them to break one stick each, followed by all the sticks as a bundle.
All three sons completed the first task easily. However, none of them could break the whole bunch of sticks, despite exerting all their strength.
While the man’s sons learnt about strength in unity, in investing, a well-built collection of assets is more resilient to market volatility than a single stock or bond.
Holding a single asset makes your investment more susceptible to a market downturn or poor company performance. On the other hand, a globally diversified portfolio, comprising a mix of asset classes, geographies and sectors, reduces the likelihood that a single asset’s underperformance will significantly drag down your overall performance. This is because other assets may respond differently to the same market conditions, or deliver better performance at different stages of the market cycle.
Figures are for illustrative purposes only.
Such a multi-asset, global portfolio spreads out your risks because of diversification. This allows you to hold the portfolio for the long run and ride out short-term market fluctuations. Hence, this long-term portfolio is also considered your “core” portfolio, allowing you to generate gains through time in the market, rather than by timing the market.
This “core” portfolio can be complemented by investing in single assets over a short-term period, when opportunities present themselves in the market. These ad hoc investments form your “satellite” portfolio.
The proportions of your Core-Satellite Portfolio will vary depending on how active or passive your investment style is.
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