Diversification is one of the key strategies in investment. We can diversify the risk of owning a single stock by purchasing mutual fund or ETF. We can also diversify the risk of investing in the wrong time (buying high) by using Regular Saving Plans (RSP). We covered this topic in our main site (read INVESTMENT “O”). In our article “How to start investing”, we also proposed some large mutual funds with decent dividend yield to consider for new investors.

While funds reduces the risk of owning single stocks, it could also potentially mute the returns that we can get from picking our own stocks. In our Tri-O Retirement Plan, we are not against the strategy of picking our own stocks. For new investors, we recommend buying funds using RSP. For mature investors, we can do a hybrid strategy. In the income or growth portfolio of INVESTMENT “O”, we can set aside some money to invest in stocks that we pick. On the other extreme, if one is really confident of his/her own stock picking skills, one can also go solely on its own investment decisions without buying funds.

In Thomas J. Stanley and William D. Danko’s book The Millionaire Next Door, one of the successful traits they observed that millionaires have is that they invest in only industries that they are familiar with. Usually these are industries that the millionaires are involved in professionally as well. Although this may be an anti thesis to the diversification strategy (to diversify beyond one stock and industry), it is a strategy that have proven to work.

Personally, I adopt a hybrid strategy. Besides buying funds and ETFs in the growth and income portfolios of INVESTMENT “O”, I pick some of my own stocks. In the income portfolio, I selected some local REITS which provides good dividend income. These are office, retail and industrial REITS. Although I am not a real estate professional, I have visited the malls, office buildings and factories own by these REITs. Visiting these properties give me a sense of how well the real estate is doing. Are the buildings crowded with good footfalls or are there many vacant units within the building? These indicators give me the necessary instinct to pick the REITs to buy.

Being a IT professional for more than 30 years, I have also built a sense of which technology trends are sustainable and which ones will fizzle off. Some of the good bets in my growth portfolio are Apple and Google stocks with the advent of smart phones and Amazon, Microsoft and Google with the cloud computing era. Some of these good investment have provided me with a 10-fold return.

So how do we diversify over time to make sure that we do not buy on the high when we pick individual stocks? I am a long term investor and a lousy market timer. By keeping some buffer money in the growth and income portfolio in INVESTMENT “O”, I usually buy more of the same stocks when there were dips during the different crises (dot com bust, global financial crisis, Covid pandemic). These allows me to safely increase the holding of these shares at a reasonable price.

Is everything nice and wonderful? Of course not, I have picked the wrong stocks that have gone bust and have bought stocks when their prices were at their all time high. Fortunately, by being a long term investor and choosing to focus in industries that I am familiar with, the overall stock portfolio is providing a decent return.

Therefore, the hybrid strategy works for me. Investing in funds and ETF using RSP provides the necessary diversification and keep me continuously invested. Having a portfolio of individual stocks help provide higher returns in the longer term.

TRI-O RETIREMENT PLAN is a simple way to help you get started on your retirement planning. Learn the FUNDAMENTALS and HOW TO GET STARTED. There is also a spreadsheet to help you CALCULATE your monthly savings and your project monthly income at retirement. You can check out our BLOGS on topics pertaining to retirement planning. Feel free to CONTACT US if you have any questions or comments.