Ten steps to a diversified portfolio
Diversifying investments means different things to different people. Some investors are willing to take on more risk, while others shy away from risk altogether. But there are certain principles that apply to everyone. Here are ten things you should consider when it comes to a diversified portfolio.
1. Define the investment strategy for the portfolio
While you surely have your favorite securities, you should still be systematic in buying bonds or equities. The first step to a diversified portfolio is to define the personal investment strategy. What are your needs? What level of risk are you willing and able to assume? How much money are you in a position to invest? Take your overall financial situation into account when considering these questions.
2. Which investments are in line with your investment strategy?
The investment options that are available for your portfolio cover a wide range of asset classes – from defensive to high risk. Are you rather conservative? Or are you comfortable with risks and ready to invest for a chance of higher returns even if this means a higher risk of loss? Different investments work well depending on your answers. Find out which investment options are in line with your investment strategy.
3. Consider the time horizon in your securities safekeeping account
In addition to the risk-return profile, the choice of investment products also depends on your investment horizon. The longer you can invest your money, the less short-term fluctuations are relevant. There are also securities with fixed terms, such as bonds. In this regard, it's important to make sure that not all bonds in the portfolio mature at the same time. That way, the capital can be gradually reinvested.
The greater the expected return, the higher the expected risk
Source: Credit Suisse
4. Spread risk across various asset classes
A diversified portfolio should have every asset class. This is because equities, bonds, and alternative investments – e.g. real estate, commodities, hedge funds, and also private equity – have very different reactions depending on influences like economic growth, interest range changes, and crises. Diversification reduces overall risk. The risk profile, investment horizon, and your personal investment strategy are all factors in deciding on the weighting of individual investments in your securities safekeeping account. It is important not to put all of your eggs in one basket when investing money. Instead, diversify the capital across various asset classes and investment products.
5. Have investments from different countries in the portfolio
There are other criteria for ensuring your portfolio is well diversified. You should buy securities from different regions and countries, not least because, in a globalized world, economic development does not necessarily run synchronously in every country. Here, targeted foreign currency positions play an important role.
6. Invest in different sectors
You can also benefit from diversifying across sectors, as it makes you less dependent on supply and demand or the trends and crises facing an individual sector. A good example is to hold equities of both a sunscreen producer and an umbrella maker in your portfolio.
Investment funds, index funds, and ETFs simplify diversification in a portfolio
7. By all means, consider defensive investments too
Even in the event that your investment strategy allows for high risk, there are still good reasons for holding defensive investments such as bonds and real estate. You can limit losses in your securities safekeeping account in times of turbulent trading and react to other influential factors such as equities. Of course, this also applies to defensive investors who want to invest not only in bonds, but also in equities.
8. Rebalance the portfolio regularly
The weighting of individual positions in the portfolio changes over time. So there's a good chance that an individual stock will suddenly double in value, while another will reduce dramatically. Even in perfectly diversified portfolios, it leads to imbalances. That's why it is essential to analyze the securities safekeeping account on a regular basis. Does the weighting of the individual positions still correspond to your investment strategy? Or should you take profits, increase positions, or buy new positions?
9. Investment funds, index funds, and ETFs are more balanced than individual securities
Diversification is – as mentioned – the essence of a balanced portfolio. But instead of making time-consuming investments in different countries, sectors, and asset classes yourself, you can also buy shares in investment funds, index funds, or exchange traded funds (ETF). These solutions invest in several individual securities in a diversified manner. That way private individuals can diversify their investments with little capital. There are investment funds, index funds, and ETFs for practically every investment strategy. If you are looking for a holistic solution that combines all the important investment principles, we recommend a wealth management solution.
10. You should have some cash in your portfolio
Uninvested capital provides flexibility. That's why a certain percentage of liquidity is part of every portfolio, even if you focus on capital gain. Because nothing is more annoying than when you have to sell equities or fund units at an unfavorable time because you need cash. However, the cash reserves that are not required should not be too high, because at the moment they do not yield much.
