Management Company "Arsagera" Article about diversification of assets, investment diversification

What is diversification?

So, by distributing funds across several investment funds, instead of investing in one, possibly the most profitable one, we reduce the risk of loss in the event of critical situations and force majeure circumstances. To put it simply, “don’t put all your eggs in one basket!”

Diversification is aimed at maximizing the profit from investments in assets that are at the same level, but react differently to a particular event. However, most professional investors agree that diversifying your assets does not guarantee protection against losses, and diversification is one of the most important components of long-term financial success.

Risk diversification methods

In order to highlight assets worthy of attention, it is important to understand what specific risks each of them poses and what factors can influence profitability.

Typically, the following types of risks are distinguished:

State (country) - any changes in the political life of the country: revolutions, coups, crises, the introduction of new laws (for example, nationalization of enterprises) and much more, affect quotes for different asset classes.
Economic. Risk factors will be any major processes occurring in the economy (inflation, recession, imposition of sanctions).
Exchange. This includes the crisis of the stock market itself. The reason is a general drop in stock prices.
Currency. The currency of any country may one day depreciate and the investor will suffer losses if a significant part of the capital was in this currency.
Industry - crises affecting a specific industry.
Issuer risk – in the event of a crisis or bankruptcy of a particular company.

Ways to diversify risks

It is necessary to protect your capital, taking into account all types of risks at the same time. Diversification of investment risks indicated above can be carried out in the following ways:

You can protect yourself from risks associated with changes in the political life of a particular country by purchasing assets from different countries. It is better to invest in different stock markets. For example, US shares can be purchased through brokers with access to American stock exchanges, Russian shares through brokers licensed by the Central Bank of the Russian Federation on the Moscow Exchange, etc. Often, at the same time as government risks, currency risks are also removed, because The company's shares are sold in the currency of the country in which it is registered.
Economic risks are minimized by purchasing different types of assets - when some fall, prices for others only rise. So, if the stock market goes down, it is advisable to transfer funds to protective assets or gold. And don’t forget that part of your money should always be kept in low-risk assets, such as government bonds and Eurobonds.
Stock market risks . is a great help against market instability . By buying a growing stock and at the same time placing a pending order for a decrease (for example, at the level of 10%) from a broker for the same security (CFD on shares), we significantly insure ourselves against loss. If the stock rises in price, then we take profit. If a stock becomes cheaper, a buy trade is automatically closed and a sell trade is opened, which significantly reduces the loss.

The essence of the hedging technique is to buy two assets that correlate with each other - when one falls, the other rises. A good example of such interdependence is the shares of retailers and precious metals mining companies.

The risk of an industry crisis is reduced by investing in companies in different industries. The more diverse the industries, the lower the risk.
The risk of bankruptcy of the issuer lies in the purchase of assets of different companies. You should not buy different assets, but a variety of assets will not help one company in the event of bankruptcy.

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What is an investor's portfolio?

The essence of portfolio investment involves the distribution of investment potential between different groups of assets.

A portfolio is a collection of various investment values collected together that serve as a tool for achieving a specific investment goal of the investor.

The portfolio may include securities of the same type (stocks) or various investment values (stocks, bonds, savings and deposit certificates, certificates of pledge, insurance policy, etc.).

Portfolio diversification rules

When compiling portfolio proportions, it is not enough to be guided by the principle of diversity alone; you need to understand what specific risks the investment protects against. It is necessary to clearly highlight what exactly this choice will bring to the investor.

Many novice investors make a common mistake - their diversification of investment risks is not systematic. In other words, they simply include various securities in their portfolio at random, guided only by the principle of “don’t put all your eggs in one basket.” And they don’t analyze what specific risks they are protecting themselves from.

A well-assembled briefcase should look like a wall in which every brick is adjusted to size, and not be a chaotic pile of stones.

What mistakes should be avoided when following the rules of diversification:

Choose only one asset class (it can only be stocks or bonds). A reasonable ratio should be 70/30 or maximum 50/50, where part is in more profitable but risky assets, and part is in stable ones.
You cannot invest in a single industry, because if it is affected by a crisis, you can lose all your funds.
You cannot take shares of competing companies in the hope that one will benefit if the other is affected by a crisis. Quotes do not depend on competition, but on the general situation in the industry. A striking example is modern Russian retail.
Acquire assets of one state, respectively, purchasing them in one currency.

Risks can be reduced by up to 90% when the portfolio is diversified between 7-10 issuers. Adding more than 10 assets is only advisable if they will actually increase profits.

Rules for high-quality portfolio diversification:

Capital must be distributed with an understanding of what specific risks we are reducing (trade, currency, inflation, etc.);
Identifying relationships between different assets in order to make diversification wise and, accordingly, get maximum profit.
Distribution across different instruments, certainly including those that are correlated with each other, in order to increase the chance of winning and not losing anything.
Regularly rebalance your portfolio to get the most out of your capital.

Rebalancing the securities portfolio

If you divided your portfolio into gold and stocks 50/50, and after a while the stocks rose and gold fell, the proportions would be 60/40. To return to the previous 50/50 scheme, we need to sell part of the shares and buy gold with the money we earned.

Portfolio rebalancing needs to be done regularly. It is logical that assets that have become more expensive can also become cheaper. And those that we did not buy when their price was favorable will become more expensive over time. If we haven't rebalanced, we won't be able to make money on it. If this process is not regularly monitored, profits will be lost.

Thus, the main goal of diversification is to minimize risks and increase the percentage of profits. When investing, do not forget about this and when new instruments appear, try to invest carefully and small amounts, study how your funds work.

Types of risks when investing

(Un)diversifiable risks, or systemic risks. These are risks that affect all assets and cannot be reduced through diversification. Such risks include political instability, disasters, wars, inflation risks and others.

Diversifiable risks, or non-systemic risks. These risks can be reduced through diversification. Such risks relate to a particular company, industry, market, country.

Why is asset diversification necessary?

Let's say you have a portfolio of airline stocks. And suddenly the workers of this company go on strike. Naturally, the value of your portfolio plummets. To prevent a fall, it was necessary to buy shares of the railway company, since passengers, due to the lack of departures, would switch to trains, and the shares of the railway company would rise.

However, you cannot diversify away from risks that could affect both companies equally. An event could occur that would lower the price of both companies. In this case, they say that the shares of the airline and the railway company are correlated, that is, interconnected. But to achieve greater diversification, you need to buy stocks not only from different companies, but also from different industries.

In addition to industry diversification, it is important to use diversification across different types of assets. For example, buy shares and bonds of one company. Thus, the price of these different types of assets may react differently to the same event.

Thus, multi-level diversification of assets allows you to reduce some risks and reduce market fluctuations by balancing different types of assets. But when investing, you should not rely on diversification alone, because, as experienced investors say, it does not provide guarantees against losses.

Types of risk diversification

Instrumental diversification.

It is this type of risk reduction that is most popular among private investors. For example: You invest in PAMM accounts of one company and within it distribute the portfolio among conservative and aggressive managers. A large selection of traders indicates that you have instrumental diversification.

Currency diversification.

Exchange rates always change in relation to each other. If you have a bank deposit in one currency, then you are at risk of a currency collapse. As it happened with the ruble in 1998. Financial advisors and foreign exchange market experts always advise keeping funds in banks in different currencies to preserve funds.

Institutional diversification.

It is a very important type of diversification that must be used in conjunction with instrumental diversification. Example: You invested in a business, but after some time, for many reasons, the company ceases to be profitable and you risk losing all your funds. Therefore, you need to use several financial assets, for example, buy shares of a company, purchase bills, bonds, or have a stake in some other business. This distribution of assets among various financial instruments will help you effectively reduce the risk of losses.

Species diversification.

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Implies a combination of the above types. In simple terms, as your assets grow, you should use many types of investments, distributing your investment portfolio into:

PAMM accounts and Ramm accounts,
Precious metals,
Shares, bonds, bills,
Business,
Real estate,
Forex trading.

This type is the most reliable among those described above, because all areas of investment have nothing to do with each other. I described ready-made investment portfolios with risk diversification in the articles: Where to invest 100,000 rubles to earn money, Where to invest 200,000 rubles.

Transit diversification.

This type is associated with the withdrawal of funds from various instruments. Most investors don't think about it, but it's worth thinking about. Today, there are no difficulties with the withdrawal of funds and most of such assets are held in the shadow, not subject to taxes (cryptocurrency wallets, Payeer payment system, etc.). The state is working on these issues and there may be difficulties with the usual methods of withdrawing profits. Therefore, you need to have several ways to withdraw funds so as not to be exposed to such risks.

What do you need to know about the risks?

The risk of losing money always exists!

Therefore, when investing, you should follow a few simple rules:

Do not invest your last money, but only the amount that you can afford;
You should not invest borrowed funds, that is, take out a loan, borrow money and invest;
Do not invest all available funds in one project;
Withdraw profits regularly. By doing this, we also reduce the risk of losses in case of unforeseen circumstances. Having “recaptured” the invested amount, you can then enjoy receiving net profit with peace of mind without the risk of losing something.