Diversification of investment portfolio
Translated from Latin, diversification consists of two words denoting “different” and “do”. This process is nothing but the distribution of the investment portfolio with minimization, or (ideally) the complete elimination of unprofitable risks. An experienced investor is unlikely to invest all his finances in one single investment tool, risking losing it. So, it would seem, distribute your funds on different instruments and sleep peacefully, not forgetting to make a profit. But it was not there! There is one subtle but important nuance. Diversification is subject to the rule, which is that the direction of investment is not interconnected. They should not be dependent on each other. Perhaps it’s clear why this is necessary. In the event of financial problems in one industry, you can be calm for those funds that are invested in another, independent of the first, instrument.
There are several types of investment portfolio risks. Let’s look at them. There are only five:
- Currency diversification. Use and storage of funds in different currencies. On Forex, transactions are usually made using the US dollar. In the same currency, traders store money in their accounts. In force majeure situations with the dollar, losses are inevitable, despite instrumental diversification. For safety reasons, it is better to store money in US dollars, euros, francs, precious metals and so on.
- Diversification is institutional. This is a distribution of investments in different companies. Do not rely on one, even if you invest in it in different currencies. After all, if the company collapses, you again lose everything. Distribute your investment portfolio for peace of mind in different, independent of each other, companies.
- Diversification is instrumental. This is the distribution of different assets of their capital. For example, if you want to fully implement instrumental diversification, include in your investment portfolio not only PAMM accounts, but also commercial real estate, investments in startups and so on.
- Diversification is transit. These are the conclusions of investment returns. To date, there is no way to withdraw funds that would be completely safe, that is, insured that he will not be arrested for any reason. That is why it is necessary to hedge yourself and provide your profit with several ways of withdrawal.
- Species diversification. Distribution of finance in different areas and areas of activity. Even if you are a fan of Forex alone and it is your only understandable and beloved type of investment, remember the rule of eggs in one basket and play it safe by contributing part of the capital to another instrument. Unfortunately, no one in the modern world gives guarantees that in any country suddenly trading in foreign currency will not be banned. Losses will be less frightening if the money is invested in stocks, all kinds of business and so on.
Having considered all types of diversification, there are a few more things to remember. As the volume of the investment portfolio grows, it is necessary to gradually increase the quality of diversification investments themselves. Do not limit yourself and your money, try to learn new ways to generate passive income. When trying new tools for you, take your time, don’t invest a large sum right away, try starting small and see how things go. Thus, you can not only study the operation of this investment tool from the inside, but also independently minimize the initial risks.