Perils of Not diversifying
the title to this post is from The Economist – one of the fine magazines that I make an attempt to read. I normally read it online but a smart lady next to me piles a few copies on her desk, so occasionally I do flick a few issues for a relaxed read.
Diversification in a portfolio is usually a nightmare for a financial adviser to achieve esp if the client is a businessman / MD of a company and his wealth comes from his ESOPs.
The most important thing in diversification is to be able to ask the investor to remove money from a rising asset class and put it in a not so raising asset class. In times of market horror shows asking a person to invest in equities, by selling a rising asset class a.k.a Gold.
Or asking a person to sell OFF his esop shares to buy a real nice big house! Now the situation is kinda funny. For too many people, net worth of Rs. 25 lakhs is actually a house with a bloated price of Rs. 100 lakhs, a housing loan of Rs. 75 lakhs and therefore a net worth of Rs. 25L. A slight fall in the ‘value’ of the house – and his networth could turn NEGATIVE. However, he is not worried because ‘he is not planning to sell the house’ right?
Here, read on
http://www.economist.com/blogs/freeexchange/2012/06/housing-and-wealth
Sanjay Singhaniya
In case of falling asset prices, the apartment owner has to lose all his downpayment before the lender loses even a penny.
Compare this to Kingfisher Airlines where lender is taking a haircut before promoter takes any losses.
Vandhana Karthick
People have strong faith on land that its appreciation value will not decreased very huge.So Investment on land is increased everywhere now a days..Negative price may not take a u turn in land…
Rajeev
Subra,
Very good and interesting post. Sometimes it is better not to look for the most profitable option today. Safety of capital will come from diversification only.
Did not see any reference to SOP’s though. What should be the approach when SOP’s form a major part of your assets?