How best to diversify your investment portfolio?
“Don't put all your eggs in one basket,” investors are fond of saying. Diversification of assets in a portfolio is the basis for long-term investment success. Do you know how to deal with her?
(This article is NOT investment advice)
Practically in every investing textbook you will find at least one chapter on diversification of the investment portfolio, that is, the spread of investments into several assets. The term diversification comes from the Latin words diversus and facere (to diversify and to diversify).
Diversification refers to the distribution of investments between different types of assets in investing. By diversifying, the investor reduces the risk of loss and increases the chance of long-term stable performance of his investment portfolio.
Speculators (people who focus on risky assets and have a short-term investment horizon), eager to get rich quick, bet on the short-term growth of one investment asset.
On the contrary, investors with a long investment horizon (Benjamin Graham refers to them as true investors in his book Smart Investor) make their portfolios of multiple assets.
An investment portfolio is a collection of all of one investor's investment assets (such as real estate, stocks, gold, bonds, or cryptocurrencies).
Why Every Investor Should Diversify
The reason for diversification is simple:
Thanks to diversification, investors significantly reduce the risk of losing all or most of their invested finances.
If an investor put all his savings into the stock of one firm, in the event of its failure, he would have no money left and would end up at zero. But if he invested a third of his money in company shares, a third in real estate loans, and a third in gold, if any of these assets fell, he would He lost only part of his invested funds..
The great advantage of a properly diversified portfolio is that the decline of one asset often outweighs the growth of another asset.
Do not forget about real estate or how to diversify the ideal
There is no universal recipe for diversification, because Every investor has his own investment goals. and everyone can afford to take a different degree of risk.
For ordinary investors with a long investment horizon (such as 3-7 years), the bulk of their portfolio should be made up of less risky assets. The latter provide a stable yield for a long time.
Low-risk stable assets include real estate and loans secured by real estate, both government and corporate bonds, gold, but also some index funds (ETFs). If most of the portfolio is based on these financial instruments, the investor can sleep peacefully.
A smaller portion of the portfolio, around 5-10%, then makes sense to supplement with riskier products such as individual company stocks, cryptocurrencies or commodities. However, it must be constantly borne in mind that these are investment assets that can experience a rapid and significant decrease in value.
On the other hand, it is convenient Avoid too much diversification If an investor spreads the funds, for example, between 15 or more assets, he is likely to achieve only average or below-average returns.
It is also advisable to diversify within individual assets. For example, in the case of investing in stocks, it makes sense to invest in companies that do business in different sectors. If one sector stops doing well, it will not jeopardise the shares of companies from another sector.
Long-term projects with a stable yield pay off
Portfolio diversification is not just about spreading finances among multiple assets.
It is also essential that some investments have a longer investment horizon and that these investments for a long time ensured a stable yield. Why take this route?
Riskier assets (typically stocks or cryptocurrencies) promise higher appreciation, but in the event of a significant drop in value, an investor can wait several years for that return.
However, when an investor has long-term fixed income projects in his portfolio, he knows from the start when and what value they will bring to him. This can be seen in the example of investing in loans secured by real estate provided by Investown.
If an investor invests money in a real estate project with a return 9.5% and a maturity of 2 years, it is confident that this investment will provide it with an annual appreciation of 9.5% over the next 2 years. This approach may pay off more than investing in riskier assets with potentially higher returns, but may not appreciate at all.
This article is not investment advice
Investown does not provide investment advice. This is an educational article with basic information about diversification in investing. For specific advice, we recommend using the services of an investment advisor.