Question: I have heard about the need to diversify investments in the capital markets. Does this include investing in other markets around the world? Asked at “Ask a Friend, Ask Efren” free service through www.personalfinance.ph, Facebook, and SMS.
Answer: Diversification is a great risk management strategy. As you know, there is absolutely no investment in the world that is risk-free. The best that investors can do is to manage that risk.
There are many types of diversification strategies that address that equally numerous types of risks present in investing. To manage the risks of having just one investment within an asset category (e.g. stocks, bonds, money market), the common advice is to buy several instruments within one asset category that can hopefully maximize the return for the same unit of risk taken. Diversification in investing does not attempt to achieve the same amount of return for a lower unit of risk. We’ll discuss units of risk in another article.
To manage the risk of having a concentration of investments in any one industry, the advice is to create a portfolio invested across several industries like telecommunications, banking, real estate, power, transportation, port services and many others.
To manage the risk of being overly exposed to one asset category, the advice is to invest across the major asset categories of stocks, bonds and money market.
There is also the recommendation of managing risks associated with investing in just one geographical location by doing cross-border or international investing. Of course, investing in different geographical locations also gives rise to currency risk. Currency risk may be managed by investing in instruments in different currency denominations and/or entering into derivative contracts to hedge against currency volatility.
But there is an investment strategy that not so many investors are aware that they are already espousing. And even if they are aware of it, they do not give that strategy the level of appreciation it deserves.
Do you want to know what it is? If so, relax, find your center and be amazed to know of its simplicity.
The strategy is investing in your own country, our country, the Philippines. Our country has much to offer, not just in financial instruments but also in other investment opportunities outside of the capital markets. NEDA’s current development plans sees the country experiencing the following by 2022:
· the Philippines will be an upper middle-income country
· growth will be more inclusive with a lower poverty incidence in rural areas – from 30% in 2015 to 20% in 2022.
· a high level of human development
· decline in the unemployment rate from 5.5% to 3%-5%
NEDA is confident of its targets because it expects that despite the slowdown in emerging markets, the ASEAN-5, which includes the Philippines is expected to recover with an average growth of 5.4 percent in 2017-2022. Even the World Bank in its April 16, 2018 report on the Philippines projects the country to grow by at least 6.6% up to 2020.
With the above prospects and the absence of currency risk to boot, wouldn’t you want to do more of patriotic investing?
(Efren Ll. Cruz is a Registered Financial Planner of RFP® Philippines and a seasoned investment manager. He can be reached at (0917) 505-0709 and at efren@personalfinance.ph. To know more about personal finance, please visit www.personalfinance.ph. To become a true financial planner, attend our 2-day training in the Visayas and Mindanao. Details are available at www.personalfinance.ph/fptraining.html.)