Portfolio diversification: how to reduce investment risks
"Don't put all your eggs in one basket" is a saying that everyone seems to know. In the world of investment, it turns into the main law of survival and is called by the beautiful word "diversification". It sounds complicated, but the point is ridiculously simple: don't invest all your money in a single asset, whether it's shares in one company, real estate in one area, or one cryptocurrency.
Imagine an investor who invested all his savings in shares of, say, a film camera manufacturer in the early 2000s. The idea seemed reliable, the company was the market leader. But then digital cameras came along, and the stock crashed. And with them all the savings of our hero. Diversification is insurance against just such stories.
The magic of distribution: how does it work?
The main idea of diversification is that different assets behave differently in the same economic conditions. When some fall in price, others may rise or remain stable. For example, during the economic crisis, the shares of many companies become cheaper, but the price of gold, which is considered a protective asset, on the contrary, may go up.
By distributing money between different instruments, an investor smooths out fluctuations in his portfolio. If one asset has "sunk", losses from it can be offset by profits from another. This does not guarantee super profits, no. The main task of diversification is not so much to earn as much as possible, as not to lose everything in one moment. This is a strategy about stability and restful sleep.
Levels of diversification: sorting them out
Just buying shares of two different companies is not diversification. Proper risk allocation takes place on several levels.
There are at least three main levels:
- By asset class: this is the most important level. A portfolio should include instruments that are different in nature. For example, stocks (shares in companies), bonds (debt securities), real estate, precious metals, currency.
- By industry and country: within the same asset class, diversification is also needed. You should not buy shares of only IT companies or only oil companies. It is better to distribute them across different sectors of the economy: finance, technology, consumer goods, healthcare. The same applies to countries: invest not only in the Russian market, but also in the markets of the USA, Europe, and Asia.
- For specific companies: even in one industry, it is better to have shares of several different issuers. If one company runs into problems, it won't hit the portfolio as hard.
The more levels involved, the more stable the portfolio will be.
The flip side of the coin: when diversification hurts
It would seem that the more different papers in the portfolio, the better. But here, as everywhere, the measure is important. Excessive diversification can also be harmful. When an investor has 100 or 200 different stocks in his portfolio, it becomes almost impossible to keep track of them all.
In addition, too much "smearing" of capital leads to the fact that the return on the portfolio tends to the average market. The outstanding growth of one asset will simply be "eaten up" by the average dynamics of hundreds of others. For a novice investor, a portfolio of 10-20 different, unrelated assets is considered optimal. This is enough to reduce the risk, but still allows us to hope for a good result.
Not a panacea, but a tool.
Diversification is not a magic pill that will completely protect you from losses. If the entire global economy collapses, almost all assets will suffer. But it definitely helps to survive local crises and private failures with minimal losses. This is a fundamental principle of sound money management.
It forces the investor to think, analyze, and not blindly believe in one "stellar" stock. It disciplines and teaches you to look at the market more broadly. And in the long run, it is this approach that most often leads to success. How to check 1xBet promo code If these are not 1xBet free bets, but another type of promotion that the bookmaker has sent, then you should check the combination in a special section. The 1xbet bonus code to get a bonus of up to ₹33,000 for sports or ₹1,40,000 + 150 free spins. Using a promo code when registering on the 1xBet platform is an excellent way to enhance your betting experience with exclusive bonuses. Some rewards give a freebet, which must be played on certain conditions (odds, type of bet, etc.). It can be a promo code for express 1xBet and many others.
