In my previous article, I've introduced the concept of diversification into 2 assets classes. Of course, this is not cast in stone. You may want to diversify into three assets classes. In this article, I will dive deeper into this topic by explaining how can you achieve diversification within the same asset class. 

Let’s use 2 asset classes as an example. Consider the following formula:

 

Your portfolio = a very low risk investment + a higher risk investment that you have competency in

 

A very low risk investment can be a fixed deposit,  money market funds or savings account, where the chances of losing your capital is close to zero. For example, cash or fixed deposit in the bank are usually guaranteed by the central bank or related agency for up to a certain amount. Even if it wasn't, you could lose your money only if the bank fails. In this part of the equation, since the risk is low, there isn't any need to achieve diversification.

 

The second part of the equation is where it gets interesting. Although by having 2 asset classes already give you certain level of diversification, you can enhance it further in this part of the equation.
I will provide 2 examples, stock and property. Let’s start with stock.

 

Once you master the skills in stock investing, you’ll learn that there are many types of businesses/companies to invest in. Each business comes with its own risks. You achieve diversification through buying shares in different companies.  For example, by buying consumer staple stocks, the risks associated are generally lower than buying tech companies. You can increase your risk by buying more tech companies or vice versa. 

By doing so, you improve your risk management by staying within your circle of competence, which is investing in stocks. Although this approach is not commonly encouraged, I personally believe this is a better approach than diversifying into a completely different asset class.

Now, let's consider another example. Let's say your competency isn't in stock investment, but property investment.

 

There are many different property types you can invest in, such as residential vs commercial properties, landed homes vs apartments/condos. Each type of property investment has its own characteristics. For example, landed homes tend to give lower rental returns while giving higher capital appreciations. Residential and comercial properties also give different risks during economic downturns as well as bull markets.The risk/reward profiles are different for each types of properties.

By staying focused on property investment but exposes yourself into various property investments, you can achieve diversification and lower your risks without going into another asset class.

 

I hope the example above gives you a better idea of my concept of diversification. My message is : stay focused within your circle of competency, while achieving diversification at the same time. In my personal opinion, this is better than investing in stock, properties, gold, mutual funds…etc all at the same time.

 

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