Once upon a time

Once upon a time, there was a rich merchant. He owned a trading post in the middle of a forest of dense mists. People would come to visit him on their journey North and buy supplies from him.

One day, a young man came to visit him.

“Sir, would you like to buy some insurance? Disaster may strike anytime you know and your loved ones may suffer if you are not around?”

The merchant thought about it, “it is true that tragedy may strike, and I do love my family. Tell me what should I do?”

The young man said, “Buy some insurance from me, sir. Ten percent of what you earn should be enough. When you earn more next time, you can buy more.”

And so the merchant agreed and bought some insurance.

Next a middle-aged man came to visit.

“Sir, I have the most wonderful opportunity for you. I know this developer and he is selling this house in this most beautiful garden beside this roadway that is well connected. Property prices only go up you know?”

The merchant thought about it. “It is true, real estate always goes up. Tell me what should I do?”

The middle-aged man said, “Buy this property and hold it, when you have enough money for another down payment, you can buy more.”

And so the merchant agreed and bought some properties.

A relative came and visit the merchant. 

“Relative! I’ve been trading stocks and I’ve made good money!”

The merchant said, “Tell me all about it, have you studied it?”

The relative said,”Why yes, I’ve studied it’s PE ratio, PB ratio, NTA ratio, it’s a buy!”

The merchant thought about it, “Brother, you are of my own blood relative, I trust you and you have always been the smart one in the family. Tell me what should I do.”

“Buy this stock now, and when I get more news later, you can buy more.”

And so the merchant parted with some money and bought stocks.

Lastly, the merchant’s banker came and visit him.

“Sir, you’ve been a great customer, and I know that you may not have access to investment in the Far East. As you know our currency is depreciating. It would be wise to put some of our money out of this lands.”

The merchant thought about it, “It is true our money is shrinking, and Far East’s economies have been growing. Tell me what should I do?”

The banker said, “I’ll take some  money you already have with us and invest them. When other opportunities arise, I shall keep you inform and you can buy more.”

And so the merchant came to own some Far East Unit Trusts.

Over the years, the young man, the middle-aged man, the relative and the banker continued to visit and the merchant continued to add on to his insurances, properties, stocks and unit trusts.

One day, one of the merchant’s customer spoke up, “Sir, I’ve been watching you bought all the insurances, properties, stocks and unit trusts and I’ve been politely keeping my distance. But I feel now is the time to tell you something.”

“Well, what is it?” The merchant asked, uncomfortable that someone should notice all the financial assets that he bought.

“Well sir, you’ve been buying and accumulating insurances, properties, stocks and unit trusts, but you don’t really monitor them and cut off the losers.”

The merchant felt offended. “What do you mean I have losers? These are my investments.”

“Well sir, in insurance, some of them have benefits which are limited and outdated and when you bought new ones, they are not the cheapest in the market and there are many more sellers than the young man who visited you.”

“In properties, there are some which have not gone up in value over the past few years and you have trouble renting them out.”

“Some stocks have been in your portfolio forever and their companies have since delisted. Your relative told you when to buy what but did not tell you when to sell them, not that they would remember what you owned from the many many stocks he recommended you to buy.”

“But the stocks may rebound later!” The merchant retorted.

The merchant’s customer continued unfazed, “Lastly, there are some unit trust not performing, and there are overlaps between the risk exposure.”

The merchant have had enough, “But if I sell off those Unit Trust and consolidate them, the banker is going to charge me another round of fees!”

“Sir, I’m trying to tell you. You are trying to grow your money, protect your family. But all those who came before held only a piece of the puzzle. They earn a commission from selling you things and thus they focus on selling. The result is that you’ve accumulated a hodgepodge of investments that is not optimal. Like a wild plant it is growing lopsided and imbalanced, it is not pruned and well taken care off.”

And this is what I notice happens to most people’s investments. It accumulates over the years to have a very eclectic mix, but the risk remain very concentrated and not diversified at all. Most people think they are diversified when they own 20 stocks or 20 properties. But if they are all in Malaysia or in one particular segment/industry, it is really not. And there is an emotional element called loss aversion in financial psychology. It is a phenomenon where people hold on to their losers instead of selling them and moving into a more profitable investment. Because selling a loser will crystallize their loss, they held on to it and pretend it will recover in value. As this is a deeply personal emotion, not everyone can get out of it without a third party looking at the situation impartially.

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