Diversification

By allocating investments intelligently, you can minimize the risk

Product manager Patrick Wyttenbach explains why you should never put all your eggs in one basket when investing.

Patrick Wyttenbach, what does diversification mean and why is it particularly important for financial investments?

The term comes from economics and means both that options are increased and risks are reduced. In the financial sector, it means 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 doesn’t perform as well as hoped.

So that means we shouldn’t invest in just one share or company but rather in several at the same time?

Correct. Here’s 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. This also applies to the various investment classes, regions, countries, sectors or currency areas, as they are all dependent on other economic factors. The basic rule of diversification is: the more varied, the better.

It’s easy to imagine diversifying a large investment amount, but how do I do it if I am only investing a small amount?

If the investment amount is relatively low, it’s almost impossible to purchase enough different individual securities or assets and to diversify effectively. It can also involve a lot of time and high fees to modify the weighting of the assets in accordance 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 for 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.

There is such a wide variety of funds these days. How do I know which fund is right for me?

The selection of funds really is enormous. The customer’s individual preferences and requirements are important when selecting the relevant fund. For example, “risk capacity”, or how strongly dependent you are on the invested capital, plays a big role. The less dependent you are, the higher your risk capacity is. However, the emotional capacity to tolerate fluctuations is also important. In technical jargon, this is referred to as “risk appetite”. Another factor is the investment horizon. The longer the money is invested for, the higher the risks and the associated potential returns could be. If you would like to determine your own investor profile, you can use the online tools or contact your personal advisor.

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