Diversification: How to Invest and Decrease Risks

The golden rule of any investor is not to put all your eggs in one basket. That is, never put all your money into just one investment project.

But how do you form your investment portfolio so as not to waste your money in vain and feel financially secure? Diversification of investment portfolios will help you, which is as useful for your purse as the number of hours you spend on relaxation, like betting after creating a Bet20 login and going to the movies with friends, is essential for your mind.

You can, of course, entrust your savings to experts, but relying on your knowledge and experience is an indispensable thing in investments. Here is how to diversify your portfolio correctly and what typical mistakes beginner investors should avoid.

Diversification in Simple Words

Diversification is the distribution of finances between different investment assets to reduce the risk of losses and systematize profits.  

If you diversify your portfolio properly, you will be protected as much as possible from the fluctuations of the world economy and receive a stable income from investments.

Diversification: Pros and Cons

The most important advantage of diversification is that even during the collapse of the economy and crisis you will protect your portfolio from complete destruction. But it’s not just about reassurance, it’s also about ensuring that your portfolio has gradual, stable growth for years to come.

Financial analysts are convinced that a proper portfolio should consist of 10 to 14 assets. If it’s less than 10, it’s risky; if it’s more than 14, it’s difficult to manage.

What Does Diversification Protect From?

Currency Fluctuations

If an investor keeps his assets only in rubles, he is taking a big risk. In the long term, a particular currency can fall against the others. After the fall, the national currency tends to recover over time, but usually, it takes quite a long time. Diversification, when a portfolio is formed of 2-3 different currencies, can reduce these risks.

A Decline in a Particular Type of Asset

If one particular type of investment becomes less profitable, it will be balanced by a more profitable instrument and make losses less tangible.

The Fall of any Company

Investing more than 50% of your savings in any one company is unwise. Even a major corporation like Apple, judging by the reality of the situation, can go down in value. Diversification helps you spread your money into different companies.

However, the downside of diversification is that a diversified portfolio, for all its stability and safety, is less profitable than a concentrated portfolio. Besides, diversification cannot be done once and for all. You will need to rebalance your portfolio regularly because the ratio between asset types may change over time.

Before we proceed with diversification tips, try to put together a portfolio that will minimize your capital loss and, even better, increase it.

What to Consider When Diversifying?

To avoid risky investments, it is worth taking into account, on which levels the portfolio can be diversified at all.

Partner Countries 

Beginner investors are advised to start investing only in companies of their own country. However, experienced investors know that it is more profitable to take advantage of opportunities in other countries’ economies. It is customary to distinguish developed markets (like Germany, UK, and USA), developing markets (Russia, Argentina, China, etc.) and frontier markets (Philippines, Indonesia, Georgia, etc.). Invest, respectively, can be invested in different types of markets. Because when the market of one country is flourishing, the markets of others may be falling. Somewhere inflation and somewhere deflation. This way you protect yourself and provide currency returns. But in such cases, you must act knowing the trends in the world economy and the political agenda of the countries with which you want to cooperate.

Different Spheres and Sectors

This means that you have to take into account different economic sectors. Each of the sectors has its characteristics. For example, if aluminum prices go up, the metallurgical companies will be in the black, and if oil prices go down, the oil and gas corporations will lose their money. So, it’s necessary to follow the news in the industry in which you have invested or are planning to invest, to make correct predictions about profitability.

Securities

A portfolio can consist of securities from different companies, and second, of securities from different industries. Moreover, according to experts, it is better to include assets in different currencies. The preference should be given to the one in which you plan to spend the most.


Categories: Investment

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January 31, 2022 Diversification: How to Invest and Decrease Risks