Diversification – why you shouldn’t put all your eggs in one basket

Your grandmother knew that you shouldn’t put all your eggs in one basket. The same applies to investments. By allocating investments intelligently, you can minimize the risk. You can find out useful information on diversification here.

The term diversification comes from economics and means that options are increased and risks are reduced. In the financial sector, it refers to spreading funds as much as possible across different markets, sectors, currency areas and securities. This reduces the likelihood of backing the wrong horse and means that the performance of other securities can compensate for any security that does not perform as well as anticipated.

An example

As we don’t know how the weather will change in the next few months, we could invest in two companies, a parasol manufacturer and an umbrella manufacturer. This means we can make the most of any weather conditions, albeit not quite as much as if we’d invested correctly in just one company. However, we also reduce the risk of investing incorrectly. The same principle applies to the various investment classes, regions, countries, sectors or currency areas, as they are all dependent on other economic factors. The principle of the greater the diversity the better applies to diversification.

Diversification with a small amount of assets

If the investment amount is relatively low, it’s almost impossible to purchase enough different individual securities or assets and to ensure effective diversification in the portfolio. It can also require a lot of time and high fees to modify the weighting of the assets in line with market developments. This is where investment funds can help. Investment funds are bundles of individual assets with different investment objectives depending on your focus. Thanks to investment funds, investors can benefit from high diversification and potential returns even with small amounts of money, geared fully towards their preferences. For example, there are asset allocation funds available which contain components of shares and bonds and control their weighting. There are also funds which invest exclusively in certain areas, such as technology.

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