What is portfolio diverzification and why it's important

The success of the investor stands or falls on the investment strategy. It is not enough to collect tips and send money to the first "advantageous" fund. Or give on the recommendation of a friend and ride the wave of Tesla shares. Try gambling with cryptocurrencies or with fast trades on the exchange. If you plan to invest long-term, withstand future financial crises and avoid large losses, you should definitely be interested in portfolio diversification.

The word diversification comes from the words diversus and facere, that is, diverse and do. In everyday language, under these words imagine a business or investment strategy that seeks to reduce risks by not relying on a single product. On the contrary, it counts on the distribution of risks and concentrates in various business or investment areas. In investment practice, it looks like you invest money in different assets, but also in different parts of the world,you choose different fields and you do not forget to invest on more different platforms or with different managers.

You think, isn't this just an unnecessary extra worry? Having to think about more investments, control more industries, companies, markets or platforms sounds like a lot of work. However, honest portfolio diversification will help you balance the financial crisis or fluctuations in some fields. Let's illustrate this with examples:

Investor A had purchased shares of several successful companies until 2019, the largest share was represented by companies such as Airbnb, Booking, but also some airlines. He also had several smaller commercial properties in his portfolio.

Investor B also likes real estate and the travel segment, but has put some of the money into a rental housing fund. He took out a mortgage for a small investment apartment and his portfolio also includes technology companies and a little bit of energy.

Who do you think is better off now? Quite possibly Investor B, who was thinking of greater diversification. Rental housing has wavered only locally. Last year, according to Data Eurostatreal estate prices in the Czech Republic by more than a quarter, which was the most of all European Union countries, while the European average remained around 10%. Shares of technology companies could then make up for its loss in the tourism segment.

Sure, you tell yourself that neither the pandemic nor the war was predictable. But some of them came out victorious, others lost a lot. The key to success is honest diversification. No crisis can be properly predicted. We all just guess, we guess, there is a lot of talk about it, but no one knows the real consequences.

Different types of diversification

Successful investors recommend choosing different assetsfor their portfolio. Most often these are stocks or bonds, but you can also meet commodities, investing in currencies or physical assets. Maybe in gold or real estate. As we have already shown, it is good to focus on different fields. Real estate, travel, technology, energy, finance. Don't just stay with your favorites. Even if you invest in a hundred companies in one segment, there will be no honest diversification and your portfolio will still be vulnerable.

Another way to diversify is to select an investment by geography. Don't necessarily stay only in Prague, the Czech Republic or Europe, and don't just invest in American companies. Crises manifest themselves differently in different markets, and if things don't go well in some places, you can reasonably withstand it elsewhere and not lose everything. And finally, while it's very unlikely that any established platform will end, it can always happen. Don't leave your investments in just one place. It is not worth betting on just one card.

Time diversification or you don't have to be rich in the beginning

We often encounter the opinion that until a person has hundreds of thousands, it is not worthwhile to start investing. The opposite is true. The result of long-term regular investment of smaller amounts is a lower average purchase price. Imagine that you want to invest CZK 50,000, perhaps in stocks. When you invest CZK 5,000 every month, sometimes you buy more shares at a lower price. Other times, the same shares will be more expensive, so you'll buy fewer of them. As a result, however, you usually get to a lower average price for buying one share than if you spent CZK 50,000 at a time. Or they didn't spend them at all because you're waiting for the best moment to buy, which may not come.

Again, don't overdo it

Yes, diversification always makes sense. But that doesn't mean you have to buy on four platforms, five managers, and have all kinds of assets in your portfolio. That would drive many a person crazy. For everyone, the ideal amount is a little different, but the main thing is not to lose track. Having to keep an eye on all segments and products is challenging and you can easily overlook a disadvantageous deal or make a bot. Think carefully, choose a sensible strategy and keep your investments under control.

Portfolio diversification on the Investown platform

How does investing in apartments through Investown fit into all this? This is a great opportunity to diversify your portfolio using the fastest growing bulk real estate financing platform in the Czech Republic. You can also diversify your real estate investment portfolio at Investown – just choose from apartments throughout the Czech Republic. The minimum appreciation ranges from 7% per year, the number of investments does not have a ceiling (on the contrary, from 10 investments above you become a member of the Premium Club with even higher profits). You can also sell the investment to ten thousand other users at any time.

Diversify your portfolio with Investown

Despite the worsening outlook for the leading economies and the forecasts mentioned above, there is likely to be a further rise in interest rates and hence in household and corporate debt.

Bitcoin has lost about 74% in less than a year. Ethereum, the second largest, is in a similar position. This cryptocurrency traded for nearly $4,900 last November, and is currently priced around $1,250.

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