How do I diversify my assets

How to diversify your portfolio

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Summary

  • A diversified and balanced portfolio limits your risk
  • Choose different asset classes, but also different sectors and regions to diversify your investments
  • ETFs are ideal for broadly diversifying your risk

Definition of diversification

Diversification is a strategy that consists of investing in different assets from multiple sectors. It means that you split your investments and vary the positions in your portfolio to hedge against if a particular sector or asset class falls sharply.

Limit your risk

When you invest, you take risks to varying degrees. Indeed, assets fluctuate and there is not a return on all value. So diversifying your portfolio enables you to mitigate the risks you are exposed to through your investments.

Let's take an example: It's 2019 and you decide to invest in shares of Air France and Lufthansa investing because you believe these two airlines have great futures ahead of them. But then air traffic will first be completely and then partially suspended due to the Covid 19 crisis. Your stocks suddenly lose between 3 and 4 times their original value.

But if you had decided to invest in pharmaceutical companies like Pfizer or stocks from the technology sector like Apple or Facebook to buy, you could have offset your loss thanks to these booming sectors immune to this specific crisis.

Keep your balance

Some investors advise against having too many trades and thus too many lines in the portfolio. They justify this with the fact that every further trade increases the transaction and broker fees. These fees create an imbalance as they detract from profits.

The good news is that there are no commissions on platforms like BUX Zero. This means you can diversify your portfolio without worrying about order fees eating up some of your profits.

The different ways to diversify your portfolio

In particular, there are three levels of diversification to help you expand your investment opportunities: after Asset classes, to Sectors and geographically.

On BUX Zero you can search for products within these parameters to find the right one for you.

By asset class

The exchanges give you the opportunity to invest in stocks, but also in ETFs, currencies, cryptocurrencies, commodities, etc. There are many asset classes and you have to know their risk / return ratio before you start.

Even if you diversify your investments, never risk what you cannot afford to lose

Technology, real estate, automotive, healthcare, energy, and travel: choose the sectors that are most stable or have the greatest potential for growth, depending on the trend.

By sector

In recent years, technology stocks have been spearheaded by web giants like FacebookNetflixGoogle and Microsoft , increased strongly. But that doesn't mean that this will still be the case 10 years from now. A second sector that is quite crisis-prone is the luxury sector, which is largely run by French companies likeLVMHHermes orDior. is dominated.

You can also invest in companies with you different market capitalization subdivide. So you can support both small businesses and businesses with a higher market value.

According to regions

Every region in the world has a different level of growth. Also, not all countries have the same economic challenges or the same economic and financial policies. While some crises are global, such as the 2008 crisis, others remain local: for example, the 2011 eurozone crisis had no impact on Wall Street.

Therefore, an ideal diversified portfolio is an international portfolio. For example, you can invest in these three markets:

  • Markets in developed countries with stable economic and financial conditions. They are therefore generally less risky investments.
  • Emerging Markets in Developing Countriesthat are less stable and riskier, but have significant growth and development potential.
  • Emerging markets, that are still underdeveloped but show positive signs of development.

Warning: Before investing in foreign countries, you should be aware of the risks involved with the Exchange rate between currencies that can sometimes eat up your winnings. You should also keep an eye on the political situation in each country, especially in the event of a change of government, for example.

ETFs, the king of diversification

Exchange traded funds, also called ETFs, are by nature Baskets of assets from different classes. They allow you to spread your investment over the tens, hundreds, or thousands of stocks in the basket, with a small starting amount. This broad exposure makes ETFs excellent, inexpensive and accessible instruments for long-term investments.

To achieve a diversified portfolio, you need to do the following:

  1. Determine yours Risk tolerance
  2. Decide how you like yours Asset classes want to split up.
  3. Choose your assets, for example by sector or geographical area. If you hesitate, go straight to the most diversified ones, such as ETFs.
  4. Manage your portfolio by adding it rebalancing regularly. Add a percentage of an asset class that is doing well, for example by selling another that is not doing well.

We hope that you now know the essential factors for building a diversified investment portfolio.

All views, opinions, and analysis in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article was not written in accordance with legal requirements to promote investment research independence and is considered a marketing communication.