Is Diversification The Key To A Resilient Investment Portfolio?

Many strategies and models can be offered for investment portfolios that are resistant to all kinds of market conditions and possible crises. However, I can claim that the most strong one is diversification.

It is unthinkable not to diversify investment portfolios in such a world. Regardless of which market or asset type you manage your investment portfolio, you will achieve successful risk management thanks to diversification.

The popular advice “you shouldn’t put all your eggs in one basket” also applies to different financial investment projects. Diversification in investment portfolios occurs by dividing our assets into different asset classes.

Moreover, not only investment portfolios consisting of various asset classes, but also allocating resources and time to different fields and sectors can be given as an example of diversification.

In the event of a crisis or other adverse conditions that occur only in a certain type of asset or in a certain sector, your financial stability will not be damaged and you will not experience a threat affecting all your assets. 

Let’s say you bought a stock related to the iron industry in the stock market and invested all your savings in these stocks.  You risk losing all your assets in a possible crisis.

However, if you invest some of it in iron industry stocks, some in gold, some in foreign currency and some in cryptocurrencies, you will achieve better financial stability. That’s why diversification is one of the most fundamental strategies in investment portfolios.

Why Is Diversification Important For Reducing Investment Risk?

Risk management is the most important issue in investment projects. Investors who can implement successful risk management strategies are more profitable and their financial stability is less damaged.

So, what can be considered among risk management strategies? When it comes to successful risk management, the first thing that comes to mind is diversification.

Diversification is required to minimize the risk in your investments and to have a diversified portfolio rather than a single asset class. Investing not only in different asset types but also in different sectors can be an example of the diversification model. In case of a possible crisis or financial adverse situation, your investment project will be completely unaffected.

Investors who do not use diversification strategies in their investment portfolios make more profits in possible gain situations, but this is generally a very risky move in challenging market conditions. Therefore, you should diversify the way you evaluate your assets by investing different amounts in different asset classes and sectors.

Within the traditional banking approach, precious metals such as gold are one of the most common investment instruments. However, even in such a highly stable and safe asset class, it is not wise to invest all of your assets through this asset class.

How Can Investors Achieve Diversification Across Different Asset Classes?

So how are diversification strategies applied in investment portfolios? Investors should first conduct detailed market research on different asset classes. Then, they must determine which asset classes they will allocate their assets to and in what proportion. At this point, they can benefit from financial experts or artificial intelligence-supported investment tools.

The most common investment instruments include stocks, bonds, commodities, real estate and cryptocurrency. Instead of managing an investment project with only one of these types of asset classes, a pie should be created in all of them in certain proportions. In this way, the diversification strategy is implemented.

At the same time, they are valid models for diversification not only through different asset classes but also in different sectors and different countries. For example, investors who want to evaluate their assets only based on the country they live in and a single industry may face a situation that threatens their entire assets in a possible crisis.

However, investors who invest their assets in different countries and industries continue to successfully maintain their financial stability in the event of a possible political or economic crisis.

What Are The Pitfalls Of Over-Diversification In Investment Portfolios?

Although diversification is a very advantageous and essential strategy for investment projects, in some cases excessive diversification also occurs due to insufficient market research and impatient decisions of investors.

Excessive diversification is a situation where profit margin decreases due to extra costs such as high transaction costs due to the large number of asset classes. I can recommend that investors get help and consultancy to achieve optimum levels and rates for their diversification strategies.

Another over-diversification problem is that investors can no longer manage their investment portfolios. In mixed investment portfolios, it becomes difficult to develop a perspective on the future and to predict and manage market conditions of different asset classes.

This reduces the motivation for managing investment projects and the right moves are not made at the right time. For pitfalls of over-diversification, these are a few of the common ones.

Is International Diversification A Wise Strategy For Resilient Portfolios?

One of the most used strategies in profitable investment portfolios in recent years is international diversification. International diversification is a profitable investment strategy that requires being active in different markets on a global scale, not just through a single country and industry.

Thanks to international diversification, you will develop a stronger investment portfolio against political or financial crises that different countries may experience.

Investors who wish to invest their assets in a single country instead of international diversification face the risk of losing all their assets or losing much of their value in the atmosphere of possible financial or political crisis that the future may bring.

However, those who develop international diversification strategies in wide geographical areas and different sectors are ready for all conditions.

Thanks to today’s advanced digital banking solutions, you can open investment accounts via online banking platforms in any country and sector in the world and manage these accounts via your mobile phone. In such an innovative banking ecosystem, international diversification should definitely not be neglected.

What Role Do Exchаnge-Traded Funds (ETFs) Play In Diversified Portfolios?

While there are many ways to invest in today’s stock markets with diversified portfolios, the ETF is among them. An exchange-traded fund is based on an index that includes investment instruments such as stocks, bonds and bonds.

It is an investment fund traded on stock exchanges and aims to reflect the performance of the index it is based on to investors. By investing in an exchange-traded fund, one can invest in hundreds of stocks in various countries at the same time.

When investing, issues such as how much income the money in one’s hand will bring, how long the investment will be kept on that investment, and from which direction the income will come from are important and these issues need to be taken into consideration.

Exchange-traded funds are similar to stocks; because ETFs can be bought and sold easily like stocks. However, the investment may bring profit as well as loss.

The prices of stock indices are calculated according to the weights of the stocks in the index and are mostly determined by the market values of the companies. In order to gain profit from this investment fund, starting investment instruments with a low amount can prevent financial problems.

Exchange traded funds consist of a combination of various stocks. These shares are actively traded on the stock exchange and offered to the public. You can own this investment fund by purchasing one or more of its shares.

See you in the next post,

Anil UZUN