THE TWO STEPS TOWARDS DIVERSIFICATION

One of the recurring questions every investor asks is: how do I spread my risk? You have probably already known the answer: by diversifying your investment portfolio. Your next question may be: How? In this article you’ll find the two steps to diversify your portfolio, and spread your risk. But it all starts with you, who could be influenced by characters, personalities and mindsets. So what feels good for you in terms of diversification may not applicable for someone else. Are you an adventurer? Are you conservative? Are you moderate? How you diversify your portfolio depends on your mindsets, characters, and your personalities.

Step One: from Very Conservative to Highly Adventurous[1]

One of the best websites you should regularly visit is Investopedia.com. You can find interactive information to help you determine the overall diversity of your portfolio. Would you invest in stocks, bonds and cash? This gives you an idea of what an overall spread of risk looks like for:

  • THE TWO STEPS TOWARDS DIVERSIFICATION
  • A very conservative investor: stocks 20% – bonds 50% – cash 30%
  • A conservative investor: stocks 40% – bonds 40% – cash 20%
  • A moderate (balanced) investor: stocks 70% – bonds 20% – cash 10%
  • An adventurous (aggressive) investor: stocks 80% – bonds 10% – cash 10%
  • A highly adventurous investor: stocks 90% – bonds 5% – cash 5%

Each spread has its own ROI. Stocks are more adventurous, but can yield a high ROI. Bonds are safe, but do not bring much ROI. Cash is usually short term, with lower interest and relatively low risk.

Step Two: diversify your portfolio

Are you “Very Conservative” or “Highly Adventurous”? Most investors don’t like to be labelled. You probably don’t mind to be called “moderate”. It’s the action that counts. So as an investor you will leave the options open. Depending on the investment climate change – a permanent game when you have been around the investment arena – you may change your attitude from adventurous to conservative, and back again. It’s always a learning experience asking aging investors about their careers. They will tell you stories about changing mindsets and shifting opinions. About listening to the right adviser, and following the wrong opinion leader. They may tell you: my best decisions were the ones I made after doing it all by myself, and drawing my own conclusions. Investors are leaders, not followers.

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It all starts with you

“Years ago, I noticed one thing about economics, and that is that economists don’t get anything right.” Nassim Nicholas taleb, the age of Black Swans.[2]

THE TWO STEPS TOWARDS DIVERSIFICATION-2

Be a leader, not follower, grab profitable opportunities when they arise

Black Swans are events that no one has seen coming. The collapse of financial markets in 2008 was a “Black Swan”: less than 1% of the world’s experts saw it coming. “Brexit” was predicted by more than 1%, but to most investors it seemed only a remote possibility. Only a few have made predictions about its consequences. Depending on your mindset and personality, you may fall back on “very conservative”, or the opposite: time to get “highly adventurous”. Black Swans shake up the establishment. They function as a wake-up call. Investors look in the mirror and wonder: is this another test? Who wins, who loses? The answer is simple. Those who diligently do their homework have less chance of losing and more chance of grabbing profitable opportunities when they arise. Those who believe every blog and TV commentators will likely make some serious mistakes. Black Swans teaches us: diversify. Do your research. Update your Balanced Investor Scorecards. Make up your own mind.

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[1] Source: Investopedia.com.

http://www.investopedia.com/articles/investing/040215/how-manage-risk-your-own-portfolio.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

[2] The Black Swan (2nd edition) – Nassim Nicholas Taleb (Penguin, 2010)

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