63) Why You Should NOT Diversify into Similar Funds

63) Why You Should Not Diversify into Similar Funds.

in other words,

Why You Should Diversify into Different Funds.


As the saying goes,


"Don't Put all the eggs in one basket".

So, it is important that you diversify your investments into different baskets located at different locations.

The same funds with the same asset types, region or country will give similar performance return.

Why?


Because they are invested in the same market. Similar funds will invest into same companies. Same companies will have same stock market performance.

So they will have similar performance.

The graph below shows 3 Malaysia equity funds and the FBMKLCI performance for the last 5 years since Jul 2012 to Jul 2017.

The Local funds gave around 30% total returns for 5 years. The ups and downs followed similar trend as the FBMKLCI.

Now look at funds invested into another area or country. In this case, you can see the 3 China funds performed similarly as well. The 3 China funds gave around 80% to 120% total returns for 5 years from Jul 2012 to Jul 2017. The ups and downs of the 3 China funds followed similar trend as well.

Now look at funds invested into another region. In this case, you can see the 3 Far East funds performed similarly as well. The 3 Far East funds gave around 70% to 100% total returns for 5 years from Jul 2012 to Jul 2017. The ups and downs of the 3 Far East funds followed similar trend as well.

Now look at global funds which invested into different countries and regions all over the world. You can see the global funds performed similarly as well. The 2 global funds gave around 40% total returns for 5 years from Jul 2012 to Jul 2017. The ups and downs of the 2 global funds followed similar trend as well.

Now look at funds invested into Bonds. In this case, you can see the 3 local bond funds performed similarly as well. The 3 Bond funds gave around 20% total returns for 5 years from Jul 2012 to Jul 2017. Bond funds are less volatile compared to equity funds, meaning not much ups and down.

The 3 bond funds followed similar trend as well, that is steadily moving upwards.

Now let's compare the different fund types into 1 graph. You can see that they performed differently. Look at the Global A as an example. Global A outperform the others in 2013. In 2015, China A outperform Global A. Far East A is having a "neck to neck race" performance with Global A in 2016 and 2017.

So what is the moral of the story?

 

Similar fund types will perform and give similar returns.

So, for diversification to work well, you have to invest into different types of funds. Not into similar fund types, country or regions.

Please note that the above graphs are for illustration purpose only. Past performance are not indication of future performance.

Please be reminded and be aware that all investments have risk. Do consult your professional investment and financial consultants.

#highlevelinvestment

#highlevelrules