Sunday, January 6, 2019

Diversification is the main rule of the investor

By definition, any investment of money carries a certain degree of risk, and in order for the investment process to be reliable and justifiable over a long period of time, the investment must be diversified - distributed among different instruments. Similarly to the saying from the IT world: investors are divided into those who use diversification and those who already use (as in my case).

The first reason to use diversification is to reduce the likely loss of the investment portfolio. The more investment instruments it includes, the greater the chance that the profitability of the other instruments will cover the potential loss of one of them. Of course, this does not negate the need to rationally pick up assets in the portfolio, because if it is all cracking at the seams, then there will be nothing to compensate for the losses.

Of course, the profitability of the wide-diversified portfolio will be very average, which can be observed by analyzing the reports of experienced investors, but taking into account the substantial amounts that can be lost with a more risky strategy, we will find such a reasonable price for reliability.

In the event that we want to actively manage our portfolio to generate increased profits, diversification will give us the right to take risks. At the same time, investment instruments are distributed in certain proportions, where most of them are "conservative" with moderate risk and profitability, providing us with a safety cushion, we distribute the remaining 20-40% among "aggressive" instruments (young PAMM accounts, HYIPs, etc. .) in anticipation of super-profits. It is important to reallocate funds in a timely manner according to the initial strategy so that the ratio of reliable and risky instruments always remains constant.

When creating a diversified portfolio, it is important to take into account all possible investment risks and remember that the distribution of funds within the same market (different PAMM accounts of one broker) at best will protect us only from trading risks, but in case of problems of the market itself (broker's bankruptcy, legal restrictions) we will lose everything. The growth of investment inevitably encourages the development of new markets and financial instruments, because even when limited to investing in one state (especially such as ours), we are not insured against crises, devaluation, and negative economic and political changes.