Home Sweet Home
Key Takeaways
Even as SG 60 approaches, remember that the stock market is way bigger than our little red dot. The Singapore stock market represents a mere 0.5% of the total world stock market. Our FTSE Straits Times index is represented by only 30 Singapore stocks.
Investing only in Singapore causes severe concentration risk, given the fact that we already consume goods, hold cash, and probably own a property here.
There are many benefits to diversifying among geographies, such as a lower risk-return ratio, but that is not the only thing you need to consider. How you put the instruments together is very important, making sure all of the pieces work together for your long-term benefit.
Every year, the period between July and August typically stokes our national pride and patriotism, filled with a range of Singapore-themed activities, discounts, and events — all of it peaking with the National Day Parade on 9 August. This year, it is SG60, and a range of vouchers have been given out to all adult Singaporeans.
For many of us, Singapore is our home. It is where we grew up, where we forged our ties and experienced the highs and lows of our lives. It is well and good to love your country, but having a home bias when it comes to investing can be sub-optimal and even dangerous.
Most of us work in Singapore, maybe own a home in Singapore, have cash savings in Singapore dollars stashed away in bank accounts, all in Singapore.
In short, we are already fully exposed to Singapore's economy, in a way that further putting all our investments into Singapore stocks — despite the comfort that familiar names may give us — leads to over-concentration risks. Should the Singaporean economy tumble, even just a little, that overexposure could cause financial pain across all your assets. Instead, it is much better to diversify and spread your risk around the world, across different economic sectors and countries.
The Singapore stock market represents a mere 0.5% of the total world stock market, and our FTSE Straits Times index is represented by only 30 Singapore stocks. That's a highly concentrated bet, even if you allow for the fact that large-cap Singapore companies, especially the banks, tend to pay generous dividends.
The chart below shows the advantages of diversifying to a global portfolio as opposed to investing solely in the Singapore market. While on an annualised basis, the returns of the Singapore stock market slightly beat the global market, from a risk-adjusted perspective (as measured by the Sharpe ratio), owning a portfolio of global stocks makes better sense for most people, especially when considering sustainable growth of capital.
There is no harm and many benefits to owning beyond SG — 0.5% of the market — in a global portfolio. Investors typically have a home bias and feel more comfortable owning companies that are household names, names that they recognise. But it is important to diversify across both developed and emerging markets.
Single-country or single-sector markets can also experience long sideways trends where prices don’t seem to move anywhere. The Singapore market (shown by the STI Total Return index below) peaked in 2007, and even after accounting for dividends, did not manage to break out of its sideways trend until the period after 2020. That’s 13 years just to break even.
Contrast this with a global stock market index (in blue) below, you can see that the diversified option, whilst suffering a bit more after the 2008 crisis, had a better long-term recovery rate and had performed better than the single country (Singapore) option.
The global stock market is large and represents an excellent investment opportunity with over 44 countries and 12,000 investible stocks. Economies often do not work in lockstep, and neither do the stock markets. When parts of the world are doing poorly, both from a market and currency performance perspective, there are usually others that are doing well.
Owning a properly diversified portfolio ensures a higher likelihood of an overall positive return — and increases the probability of a consistent performance. Holding a diversified portfolio from both developed and emerging economies also enables you to target areas of higher expected return such as size, value and profitability.
Apart from owning too much of their home country's stocks, investors often misunderstand diversification. You may own 100 stocks, but if all the stocks are related to property REITs or the telecom sector, then you are not diversified at all. You can see from the chart below (Singapore REITs in white, Global REITs in orange) that even within a narrow sector — keeping only to specific allocation gives you a wide dispersion of returns, often with poor results.
For example, in the 80s, there was no such thing as emerging markets. Today, due to the growth of these economies, they form around 12% of a global equity portfolio. You need not have kicked yourself for missing out on China's and the other Asian Tigers’ growth; if you were properly diversified, you would automatically have been allocated to these companies.
Diversifying among geographies is not the only thing you need to consider.
How you put the instruments together is very important, making sure all of the pieces work together for your long-term benefit.
You will need to ensure that you are well spread throughout all the different asset classes — equities, fixed income, commodities and cash — and have an estimated measure of what risk and return your portfolio will bring.
In the end, what matters to your investments is not how individual countries or asset classes perform each year, but how all the investments work together in a portfolio to meet what you desire.
Having a concentrated position in a few investments, just because you feel comfortable or knowledgeable in the area, is not an ideal situation; you will have a bumpier ride and are likely to suffer from lower returns in the long run.
Instead, constructing and investing in a properly diversified portfolio will give you a smoother and more consistent investment journey.
