Investment experience 15.02.2022
Diversified Portfolio
The best portfolio is optimal in terms of the number and type of securities, which means the portfolio with the highest profit expectations.
CONTENTS
What is a Diversified Portfolio?
- A diversified portfolio is an investment in securities with different risk levels based on different investment ratios in the market, building a reasonable asset structure that can spread the risk or minimize investment risk. Diversifying a stock portfolio doesn't eliminate all risk, but it can reduce that level of risk according to the principle that ‘Don’t put all your eggs in one basket.
- There are many reasons why it is necessary to diversify the portfolio. Simply put, by expanding the scope of investment in many companies, and sectors that do not have many linkages together, investors can control price fluctuations with their portfolios due to the fact, that it is very rare that all industries go up or down at the same pace and in the same period. Therefore, diversification will ensure a more stable operation and less risk for investors.
- The best portfolio is optimal in terms of the number and type of securities, which means the portfolio with the highest profit expectations. Investors need to study different types of securities, compare profit expectations, and choose the type of securities with the highest profit expectations.
Some ways to Diversified Portfolio
- Diversification of securities: if you invest all capital in one type of stock that the business of that company is not good, even bankrupt, the investor not only does not collect dividends but also loses capital. Therefore, investing in a variety of securities, even if some of them are at risk, still takes profit from other securities to offset the losses.
- Diversification of issuers: if the portfolio includes government bonds, the investors do not need to diversify the type of issuers, because government bonds are almost not at risk. However, if investors buy corporate bonds, local bonds, or stocks, diversification of issuers is a matter of consideration, because these types of securities always carry certain risks.
- In addition, it is possible to diversify by business field, revenue source, or diversification by geographic location.
- Diversifying depends on the financial ability of each investor. If the financial ability is limited, investors focus on a few types of securities to help the turnover of capital be more flexible.
- No matter how diversified the portfolio is, never without risk. Investors can minimize the risk associated with single securities (non-systemic risks), but there is always a risk of the nature of the market (systemic risk). This risk can affect most securities and diversity to any extent cannot prevent them.
- Investors have the wrong view that risk is inversely proportional to the number of stocks added to the portfolio, this is not true. There is clear evidence that investors can only reduce risk to a certain point where further diversification is not beneficial.
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