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Often, investors mainly focus on the research of investments. While there is nothing wrong with focusing on the due diligence process, I realise that asset allocation is just as important. In my opinion, asset allocation is the a key factor in determining the performance of the portfolio.
Many may argue that the performance of the portfolio ultimately lies on how well the investment does, however, how do we deal with the uncertainties that surrounds certain investments? Do we just completely eliminate such investment opportunities? With investments, there will always be uncertainties. Efficient Market Hypothesis does not work well in the short run; hence such imperfect information in the market creates uncertainties and mispricings.
I believe in order to reduce such uncertainties, it is done through the size of each investments. When Sui Chuan and I decided to enter the Japanese equities market, there were numerous uncertainties surrounding the Japanese equities.
- Depreciating Japanese Yen
- Lack of English Annual Reports
- Poor Corporate Governance
Given such macro-uncertainties revolving round the Japanese market compared to our other 3 core markets, we decided to allocate only a small portion (< 10%) of the investment portfolio to it. One may question, why even enter the Japanese market? The answer is simple, the Japanese market was too cheap to be ignored.
Fast forward today, the situation with the Japanese economy has not only not improved but worsened.
- Japan’s negative rates a looming headache for central bank
- Negative interest rates – are there any positives?
We are looking at unrealised losses, north of 15% for each Japanese company. In a portfolio of equal sizing, such unrealised losses would have greatly impacted the overall performance of the portfolio. However, with our decision of allocating <10% to the Japanese market, we were able to limit such losses such that gains from the other markets are able to easily cover the losses from the Japanese market.