Wednesday, August 8, 2012

Interesting results from the Consumer finance Survey

Here are some interesting results from the recent Consumer Finance Survey by the Bangko Sentral (Philippine Central Bank):

The Philippines has a young population. The age distribution of household members showed that 21.5 percent were 5-14 years old, these figures also indicated that a significant increase in the country’s labor force could be expected over the next decade

 Only a very small percentage of households owned securities and investment accounts such as stocks, bonds, mutual funds and unit investment trust funds (0.4 percent).

 Most households that owned their house/house and lot acquired the property through cash payment  and inheritance/gift. Only 6.7 percent borrowed money for their housing.

 About 16.2 percent of households owned at least one other real property aside from their residence.

 Eight in ten households (78.5 percent) did not have a deposit account. Among those with no deposit accounts, the main reason cited by 92.8 percent of households for the absence of a deposit account was that they did not have enough money for bank deposits.

 About 40.6 percent of households owned a farm or business. Businesses of households were mainly in wholesale and retail trade, and agriculture, hunting, forestry and fishing

 Food and beverages consumed at home accounted for 38.5 percent of the annual household expenditures.

 Majority of respondents would not risk their income to undertake risk-taking activities that could increase their current level of income.  About  7 in  10 respondents chose to stick to their current level of sure income of P1,500 per week rather than take the risk of investing  in  a new product with a 50-50 chance of either getting  P4,500 (three times their current income) or suffer a loss of P1,500 (equal to their current income).

Tuesday, August 7, 2012

Is there such a thing as overdiversification?

Most personal financial advice recommend that investors diversify. I agree; but come to think of it, is there a point where your investments become too diverse without any real benefits? For instance, there was a study that showed owning more than 20 shares in your stock market portfolio would provide very little risk reduction. Owning just one share is risky, when you own 2 shares, you have reduced the risk significantly. When you own 3 shares, the risk is reduced even further. But owning your 21st or 101st share only reduces your risk by a tiny amount. Limiting the number of shares you own would also force you to think hard on which companies to buy and get to know them better.

This would also apply to mutual funds and UITFs. There are plenty to choose from but there is no need to divide your money into all of them. Perhaps choosing 3-4 would offer enough diversification. Real estate can also become overdiversified. Why not sell some of your less expensive properties and buy a few really good ones. There is really no need to own 10 currencies even if banks like HSBC and Citibank offer multi-currency accounts. Maybe having 2-3 currencies aside from the peso would be enough to reduce risk.

Diversification is essential to protect your investments. As they say, don't put all your eggs into one basket. But carrying too many baskets would be quite cumbersome as well. Happy investing!