Diversification of Investments: How to Assemble a Secure Portfolio

Written by: William Garriell
05/22/2019

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Did you know that diversifying investments is one of the secrets of big investors? Diversifying applications helps you mitigate risk and ensure good profitability in the medium to long term.

Probably, you have probably heard the popular saying “never put all the eggs in the same basket”. It well sums up the concept of a diversified portfolio. It means to avoid that all its profitability is exposed to the same type of risk of a segment, market, and indexer.

In this text, you will find many tips on what diversification of investments is and how to have the ideal investment portfolio:

Why is it Important to Diversify Investments?

It is possible to minimize the risk of investing and to ensure a profitability above the market average. To understand the diversification of investments, it is necessary to keep in mind that the market and the macroeconomic scenario are significantly volatile. Even when analyzed in the long term, it is difficult to predict with 100% certainty that an investment will be the most profitable available. Therefore, it is risky to allocate all of its capital to assets of the same class.

Thus, it is vital that diversification of investments is carried out in a balanced way according to its investor profile, guaranteeing a profitability above the market at the cost of a controlled risk. Keep in mind that there are many investment options.

Advantages of Having a Diverse Portfolio

Risk Reduction

Reducing risk is one of the biggest advantages of having a diversified portfolio. With security, the investor can relax with his investments. Regardless of the taste for risk, all investors are relieved to know that they are more protected. This is because when making a good diversification of investments, it is not enough for an indexer to fall, it is necessary for everyone to do it together.

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By diversifying your investment portfolio, you will open up several paths to good profitability. If some of them appear to be great opportunities, you are raising the return on your investment portfolio as a whole.

Balance

Today, even the professional traders often allocate a part of their earnings to various investments. The name of this is balance. And it is only achieved through diversification of investments. Sometimes maintaining this balance is slowing the growth rate of your capital, but it is the best way to build equity in the long run.

Convenience

The diversification of investments can bring more convenience when investing. As we know, fixed income assets have maturity dates and the ideal is to keep them until the end of this period. If you have all of your capital in just one application and it does not offer immediate liquidity, you may have problems in the face of adversity. In diversifying investments, this factor can be minimized.

How to Divide Your Investments and Diversify to Have More Security?

The first step in asset diversification is to discover yourself. As said, the concept starts from the choice of investment products that react in different ways to the circumstances and variables that affect profitability. So diversifying is not choosing products, but choosing asset classes, markets, and segments with the right proportion to your investor profile.

1) Understand in what Financial Cycle your life is

You can be in one of three types of cycles: accumulation, monetization, or capital preservation. This cycle is defined by the relation between generating wealth and possible profitability of available capital. If you are early in your professional life and do not have capital, then your cycle should be that of accumulation. If you already have capital, but your main source of wealth is still your work, you are in the profitability phase.

2) Know your investor profile

There is no investment portfolio that is ideal for everyone because each person has a different personality. You may be conservative, moderate, or aggressive. It all depends on your taste for risk. It essentially depends on your discomfort in the face of potential profitability problems that may occur.

The ability to take risks varies according to age, job stability, ability to save, long-term goals, whether you have dependents, income level, and so on.

3) Define asset classes

You should now select the asset classes you wish to own in your investment portfolio. They can be fixed income, variable income, multimarket, pension, real estate, and foreign exchange.

4) Choose the ideal proportion of each class

At this point, you will analyze the macroeconomic factors like inflation, interest rate, political expectations and so on. With this study, you need to balance the percentage of classes in your investment portfolio. The average profitability and volatility of your assets should be in accordance with steps 1 and 2 so that you are comfortable with the portfolio you choose.

5) Select Investment Products

Only now, you should worry about which assets to choose, whether LCI, ACL, pre or post fixed, shares, DI funds and so on.

6) Track and Rebalance your Wallet

If the investment portfolio has been consciously set up, monitoring it should be minimal, since all assets have already been chosen according to their natural behavior. What should be accomplished is periodic rebalancing.

How Many Assets Needed and How to Choose the Best?

That depends a lot on the size of your capital, the time you want to take along, and your investor profile. For those who already have assets of more than $100 thousand, 5 classes of assets divided into less than a dozen products is enough. When choosing, take into account the issuer of the asset, type, grace period, liquidity, profitability, rating and the minimum contribution. Make sure to follow your initial strategy always.


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