Diversification: Protecting Portfolios from Mass Destruction 5.00 / 5 (100.00%) 1 vote

Every investment carries an associated risk  and but there is one element to place your focus diversification: protecting portfolios from mass destruction. Its the best alternative to achieve expected returns and reduce risk.

By diversifying your portfolio, risks of the instruments can be offset, and the portfolio or group of instruments tends to have a less fluctuating performance.

Diversification: Protecting Portfolios from Mass Destruction

Put more colloquially, the idea is to follow the logic of never placing all your eggs into one basket. Therefore, when investing, you should remember the different variables of the instruments and the purpose of your investment, such as profitability, liquidity, risk and investment horizon.

All these components must match your investor profile; retirement age, purpose of investment, etc. In other words, you should feel comfortable with the investment decisions you have taken and they should allow you to meet your needs as they arise.

For example, imagine that you have $1 million to invest, so you decide to buy shares in a single company. The diversification that took place there is zero, because the money is in a single company, which means that the risk being assumed is greater than if you had chosen to invest in a number of different instruments.

Conversely, if you opt to invest that same million dollars in a number of shares of several companies, and in different types of instruments, such as debt securities, mutual funds, investment fund shares, etc. the probability of losing capital is lower, since you now have a varied portfolio where the risk is distributed through various instruments with different maturities, belonging to different sectors of the economy.

Therefore, if a stock or share of a mutual fund loses value, potential gains from another instrument can help offset that loss.

Three Tips to diversify your investment portfolio

1.  For different categories of assets

Your investment portfolio may combine different asset classes, such as asset capitalization, debt, currencies.

Remember that the ratio of assets to choose will always depend on your investment profile, i.e, on how risk averse you are, your investment horizon and the reasons for their investment.

2. Spread among different types

When you have chosen the type of assets in which to invest, you have to diversify the types. For example, shares of different companies, different levels of risk and liquidity, bonds with different maturities; mutual funds with varied investment or strategy aimed at different types of investments.

3.  Invest by economic sectors

Instruments of companies from different sectors greatly help reduce the risk of your investment portfolio.

Usually, business cycles favor some sectors more than others. For example, in times of expansion and consumer sectors like retail and construction, have good results, but not in times of recession and where the economy is in a slow growth. Therefore, having diversification by economic sector also helps to better distribute investments according to the specific industry and hedge better bets.

While its true that not all investors have millions of capital to invest in a broad range of securities, dont place so much focus on the amount because everyone should reduce risk when investing. Your focus should be on diversification: protecting portfolios from mass destruction.

3A%2F%2F1.gravatar.com%2Favatar%2Fad516503a11cd5ca435acc9bb6523536%3Fs%3D75&r=G /%