Here you can read much more about diversification and learn about the importance of spreading your investments.
When you start investing in shares, it's important to familiarize yourself with concepts such as diversification, which is the spreading of investment risk. It is always a good idea to have a broadly diversified portfolio to ensure the best balance between risk and return.
Let's start by clarifying what diversification actually is. You will certainly come across diversification when you start learning about investments. Diversification is the spreading of your funds and is an investment strategy that is all about spreading risk.
For example, if you invest all your money in one company, your wealth will go up and down based on the performance of that company alone. Conversely, if you invest your money in ten companies, your wealth will go up and down based on the performance of ten different companies.
Portfolio diversification is a key principle for any successful investor to live by. Rather than putting all our eggs in one basket, we put our eggs in several baskets.
In short, an investment portfolio is a collection of the different investments you may have.
Depending on the structure you choose for your portfolio can have an impact on your final return, combined with the risk you take. You can combine your portfolio with stocks that are riskier and have the potential for higher returns - with the more reliable stocks, where the returns are slightly lower but the risk of loss is much lower.
This is where diversification comes into play.
That way, you haven't put all your eggs in one basket. Many experts estimate that a successful portfolio has around 25-30 different assets. For example, a combination of shares, bonds and real estate investments.
But why is diversification important and what are the main benefits?
Investing would be super easy if you could see into the future. Unfortunately, the future is very unpredictable and markets are constantly changing. If your entire portfolio is made up of shares of one specific company - and that company goes bankrupt or there is a dramatic drop in shares - your portfolio suffers a big loss and you could end up losing a lot of money.
This means that there is a significantly reduced risk if you diversify your portfolio and spread your investments across several horses. The odds of losing money are significantly lower when you diversify - because if you lose money on one asset, you can offset the loss from another asset class at the same time.
Diversification also allows you to use multiple investment strategies to maximize gains - for example, by mixing your portfolio of shares, bonds and crowdfunding.
Read more about passive income here.
When diversifying your investments, you can choose to diversify both broadly and deeply.
One way to diversify is to spread your investment across several different asset classes - be it shares, bonds, commodities - such as gold - index funds or real estate. Here you will be able to hit a much broader target. In this case, your investments will be less exposed to market fluctuations.
Broad diversification will therefore reduce the sensitivity of your portfolio to market fluctuations because your investments can move in different directions and may not be affected in the same way by global events and movements.
You can also choose to diversify within the same asset class - for example, stock diversification. This will allow you to diversify in more depth. You can also choose to spread your investments across specific sectors, industries and countries.
Your diversification and number of shares should be based on your risk profile - which is assessed according to your risk capacity, risk appetite and time horizon. For example, the longer your time horizon, the more risks you can afford to take. Risk capacity refers to your current and future life situation - your salary, disposable income and fixed expenses - as well as any debts. As mentioned before, you need to find the balance between risk and cost that makes sense for you.
One of the main advantages of crowdlending is that it is a type of investment that is highly resistant to yield reduction. In a highly volatile market - i.e. a market where the value of shares jumps and falls from day to day (e.g. due to unrest in Ukraine) - crowdfunding is a more stable investment vehicle.
This is because crowdlending is basically you lending your money for the construction of real estate projects. The money you lend has to be paid back to you with interest.
Interest rates are fixed.
In this way, your return is also fixed, whereas classic investment vehicles such as shares and bonds are variable.
Read more about the benefits of crowdlending here.
If you are curious to further diversify your portfolio but don't know in what, you can read more about what you can invest your wealth in here.
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Historical returns are no guarantee of future returns. The money you lend to projects can therefore increase or decrease in value and there is no guarantee that you will get back the full amount lent.
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