Author: Özge Nur Karakoyun
Pubblication date: 08.02.2024
Diversification is an important investment strategy that aims to reduce the overall risk of a portfolio. In particular, it involves different capital allocation strategies with the aim of minimizing potential losses and increasing returns.
How does diversification work?
Diversification works by creating an investment portfolio that matures over appropriate lengths with low asset correlation and appropriate risk tolerance. More specifically, it involves spreading investments across different asset classes, geographic regions, sectors and companies of different sizes. Geographic diversification involves investing in securities in different regions to reduce risk and increase returns. Strategically, diversification can be approached through asset diversification, industry diversification, and geographic diversification.
Benefits of diversification
Holding diverse investments reduces the overall risk of the assets you invest in. If something bad happens to an investment, you're more likely to have assets that aren't affected if you diversify. So, diversification can result in a larger profit if you expand into asset classes you would not otherwise invest in. Additionally, some investors find it more enjoyable to pursue diversification as they research new companies, and own different types of investments.
Why is diversification important?
While market conditions may increase the value of any investment instrument, they may decrease the value of another investment instrument. Therefore, it would be beneficial to include investment instruments whose prices move in opposite directions in the portfolio. What do we mean by this? As the price of one investment instrument increases, the price of another may also increase. This means that these two investment instruments move in opposite directions to each other. Thus, you can increase your returns while reducing your risks by diversifying your portfolio.
Diversification with examples
The best example of diversification strategies being performed in a company may be Apple. Apple first started producing computers and then diversified, creating a growth opportunity. Apple is increasing diversification as it develops new ideas and products every year. This led to the invention of tech like the iPhone, the iPod, and even the Apple Watch. Microsoft has also done a similar process. They have expanded into the video game industry with the XBox, one of the leading products.
Diversification as a result of investment
As a result, diversification is a common investment strategy used to minimize the possibility of experiencing large losses. It is an important investment management technique when applied correctly. Also, it is to optimize returns by spreading their investments across various asset classes, sectors, and geographic regions.