Diversification of the Investment Portfolio

Did you know that the way to get a high return on your investments without compromising your wealth is to have a diversified investment portfolio?

It is so, and there is no doubt that using diversification as an investment strategy is the secret key to achieving highly favorable and competitive results with an extremely low-risk margin. This is because the risk of market fluctuations is minimized while the potential of your investments is greatly increased.

Now, what is an investment portfolio, how does it work and what are its benefits?

An investment portfolio consists of financial assets such as shares, acquired debts, and raw materials, among others; which are intended to be the financial instruments that will help and lead companies to raise their potential and performance.

How does it work? 

• Counting on various types of assets.

• Managing different levels of risks.

• Establishing that the assets are not related to each other to minimize possible losses and inconveniences in the future.

Main benefits

1. Minimizes risks on the portfolio side.

2. Increases long-term performance.

3. Covers investments from market volatility

Below, we detail the most well-known and managed types of investments in the market:

• Fixed income investments: Ideal for the inexperienced since it is a calculated risk investment where a fixed income is established, negotiating profitability and return on investment before investing.

• Variable income investments: At the moment of investing, the profitability of the investment is not known, its return is not assured and it is highly variable, which can generate both high yields and total losses.

• Stock market investment: Ideal for beginners because it is easy to access and of low risk. It is usually used when companies need to finance a project.

• Foreign exchange investment: Short-term investment where international currencies are acquired (dollar, euro, pound sterling, yen, among others) with the aim of selling them by raising their value and recovering profits.

• Investment in raw materials: It consists of buying and selling commodities or tangible goods that can be exchanged for other goods that have a similar value or that can be used as raw material in the creation or manufacture of other products, tangible or quantifiable goods. 

• Investment in real estate: Highly profitable and maintainable investment over time thanks to the fact that, generally, real estate increases its value while keeping investment risk to a minimum.

Types of risks:

There are different types of risks and knowing them can help you to better discriminate your investments, thus avoiding risks and losses. Below, you will see the two most common:

1. Beta, systemic or market risk.

This risk directly affects the market without taking into account the company in which it was invested, thus affecting it with great speed and magnitude, which makes it a non-diversifiable risk.

Now, this risk can be measured by using the beta coefficient of the project which is carried out by taking into account the following values:

• The interest rates.

• The price of the shares.

• The currency exchange rates.

• The prices of raw materials.

2. Non-systemic or individual risk:

Unlike the previous one, this is a diversifiable risk since it affects companies that are conditioned by the following profitability factors:

• Fraud.

• Drop in sales.

• Competitiveness in the market.

• Poor investment management, among others. 

In turn, there are other types of risks such as operational risk, liquidity risk, default or credit risk, legislative risk, interest rate risk and inflation risk, which we advise you to handle before entering the world of investments.

Levels of risks:

Knowing this, we emphasize the importance of diversifying and varying your types and levels of investments and risks to avoid large losses. Another important factor to take into account when diversifying your investments is age since according to it you will be able to detail the time during which you want and will be able to invest. For example, if you are reaching retirement age, you will not want to have to pay large fees for your investments but rather, receive the benefits of these.

Undoubtedly diversification is the best tool that an investor can use to minimize their risks, but one of the biggest mistakes that beginners make is to believe that it is as simple as buying and buying to have a great portfolio and it is not like that. 

Let’s remember that the key to success in investing is the monitoring and knowledge of the real market situation, so having a large portfolio may prevent us from being aware of important factors when investing, raising our risks considerably and making it impossible to manage our investments.

Something that we must remember and keep in mind when investing is that profits in investments are not 100% guaranteed, falls and crises are a real part of the economy, so the risk will always be present, thus, it is up to us to pay attention, seek advice and have at hand all the tools to do them in the best possible way. 

So we close this article with 7 tips to minimize risk when diversifying your investments:

1. Know the types of investments to determine which are the most appropriate for your company and objectives.

2. Know the types and levels of risks to be able to detect and minimize them quickly.

3. Balance the amount of risk you take.

4. Have all the necessary information about the assets that will be used to diversify investments.

5. Perform situational analysis to detect future scenarios that could affect such investments (Political, social, and economic analysis, among others).

6. Carry out constant evaluations on the results and profitability of these in order to be able to react quickly as the case may be.7. Have knowledge (and advice as appropriate) on financial risk protection and management policies to protect investments and their results.