Anyone investigating the subject of investing will soon come across the term diversification. In other words: “Don’t put all your eggs in one basket,” “Spread your risk,” or “Invest in different asset classes.” But what exactly is meant by this?
Diversification: spread the risk over several “shoulders”
The world of asset classes and instruments is diverse. Investors can, for example, invest in companies, real estate, commodities – ranging from orange juice to live animals to gold – or art. You can hold equities, bonds, ETFs (Exchange Traded Funds), investment funds or structured products, invest in fund savings plans, take out time deposit accounts, or buy and sell options. Not every investor must and should take advantage of all the opportunities offered by financial products. But there are risks involved in devoting yourself to just one investment, industry or region. Diversification is therefore essential for investors.
Avoid risk concentration
Anyone who invests their entire investment capital only in the shares of a single company has usually been badly advised. At the end of the day, the risk of losing all the money if the company goes bankrupt cannot be ignored. What should you do instead? It is advisable to distribute the capital at the very least between several companies. You should make sure that the companies do not all operate in the same industry. Because even then, the risk of suffering large losses, for example if the industry is hit by a recession, would be too high. Diversification should also be achieved by combining investments from different countries and regions. The development of the investments will thereby be dependent on various economic factors and the risk can be spread.
Further diversification by asset class
A broadly diversified portfolio is not only characterized by avoiding economic, geographic and thematic dependencies. A balanced portfolio should also include different asset classes. Equities perform differently from bonds or commodities. So when you invest money, you should have a mix of equities and bonds from different sectors and countries in different currencies, for example, tailored to your goals and needs and in line with your risk profile. More stable investments can also be mixed with somewhat riskier investments. The general rule is that the less the individual investments correlate with each other, the better the portfolio is diversified.
Investment funds make diversification particularly easy
Anyone who does not want to address the subject of portfolio diversification in detail can fall back on investment funds. These investment products are already diversified to a certain extent. For example, there are investment funds that combine different asset classes and currencies, and those that combine industries and regions, asset classes and industries, etc. There is a wide selection and a huge number of possible combinations. If you hold several investment funds with different focuses, it is relatively easy to achieve a broadly diversified portfolio.
Non-cash dividends as part of “diversification” – but only if you are already diversified
Investors who wish to diversify beyond the traditional criteria can also supplement their portfolio with investments that pay non-cash dividends. Of course, they should do so only if general diversification is still guaranteed, because this type of distribution of an investment does not lower the risk in principle. Some stock corporations pay out their dividends entirely in the form of tangible assets, i.e. non-cash dividends. These can be products or vouchers for services of the company, or food and drink at the General Meeting. If you have already broadly diversified your own portfolio, you can supplement it well with investments that pay suitable non-cash dividends.
Women invest differently
Whether you are a man or a woman, diversification is vital for all investors. However, female investors are often at an advantage. As a rule, they pay more attention to broad diversification and reason in a more long-term and balanced way. This means that they remain calm even in turbulent times. This is of particular benefit to female investors who are looking for stable returns in the long term. After all, frequent buying and selling of investments can not only endanger diversification, but can also quickly become expensive. Regardless of gender, the simplest way to limit the risk associated with financial investments is to diversify your own portfolio in line with your personal profile, review it regularly and realign it if necessary. We will be happy to help you achieve your personal goals step by step.