By diversifying, you can create a portfolio with the lowest risk. In addition, other advantages should be noted :
Reducing non-systemic risks. Thus, a sharp drop in oil prices worsens the state of the oil and gas industry, but when investing in different areas, overall losses are reduced.
Reducing the volatility of the investor's portfolio. It is necessary to diversify by asset type, country, industry - in this case, it is unlikely that the value of securities will change in the same way. When some start to rise in price, others will become cheaper, and vice versa. It is clear that such a portfolio will not bring high income, but the losses in general will not be significant.
Diversification of investment risks investor data package ensures the formation of a balanced portfolio. The investor himself determines the required return taking into account the risk he agrees to.
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However, diversification also has its disadvantages :
The absence of strong price fluctuations reduces the amount of expected income. When one asset rises in price, another usually falls, that is, with diversification, the total return of the portfolio may decrease.
During a crisis, diversification does not produce a clear effect. At this stage, interest in the assets of most enterprises falls sharply, which leads to their depreciation. Although some instruments are less susceptible to price fluctuations. Thus, the value of bonds decreases rather slowly, while coupon payments are maintained.
Diversification is needed mainly to protect against risks. Risk management during diversification is carried out in accordance with the investor's preferences.
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Alexander Kuleshov
Alexander Kuleshov
General Director of Sales Generator LLC
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