Diversification: how to protect your investments

We all know that there is no such thing as an investment without risk. Of course, the risks can be higher or lower, some can be controlled (to some extent), others not at all. At best, they can be anticipated and thus minimize possible losses, but the associated risks are inevitable, and ignoring this aspect represents a serious money management mistake. Here the concept of diversification comes into play, which should be studied and applied, in a personalized way, by each investor.

What does risk or portfolio diversification mean?

Diversification is a recognized principle in economics that can make the difference between investment success and failure. Whether your goal is just to preserve capital (savings) or multiply it (investments), there is one basic rule that applies to all the questions above: never put all your eggs in one basket! This is what diversification means.
Never invest all your money in one direction, because then you become vulnerable. Diversify your investments to disperse the risk associated with each instrument.

How to correctly diversify your portfolio

If we are talking about savings, it would be appropriate to: hold your capital both in local currency and in a major currency, in multiple banks, in multiple financial instruments, and not just in bank deposits. So, if there are unfavorable influences on the local currency (due to the interests of a certain financial instrument or with a certain financial institution) only a part of the savings will be affected and not their entire value.

If we talk about investments, it is advisable to diversify the portfolio in several directions: it is advisable to invest in different categories of financial instruments, and here we take into consideration a wide range of aspects, in ascending order of risk: bank deposits, government bonds, bonds, investment funds, ETFs, shares, CFDs and other financial derivative instruments.

Depending on the sector or industry, the portfolio in question will not have total exposure to a particular domain. In the case of stocks, we can choose them from different sectors (banking, pharmaceutical, oil, construction, technology, private equity, or government). An investor also has the option of investing in stock indices, which aggregate the price of multiple stocks from different sectors into a single instrument. In the case of stocks, geographic diversification is also recommended, i.e. exposure to multiple countries or even multiple continents. Therefore, local, regional, or political influences or a potential crisis or recession should not have a major impact on the entire portfolio.

Finally, diversification in terms of time horizon is also essential: any portfolio should include both long-term, short-term, or speculative investments. It should also be borne in mind that diversification can be achieved differently, depending on the investment profile, age, risk propensity or aversion,
investment objectives, amount and source of funds, etc.

Always consider the risks

Any opinions, research, analyses, prices, or other information provided under the heading of general market commentary do not constitute investment advice. Please note that information or research based on historical data does not guarantee future performance or results.
Investing is a risky activity that involves the possibility of putting your capital at risk and losing money.

Original article published on Money.it Italy 2023-01-04 13:27:11. Original title: Diversificazione: come proteggere i tuoi investimenti