Why Do You Have To Diversify Your Investments?
When we decide to invest for the first time, one of the main advice we will hear is that we must diversify investments. For us to understand each other, diversifying investments implies “not putting all your eggs in the same basket” . The objective is to assume the least possible risk seeking the maximum profitability.
The importance of diversifying investments
Imagine that you invest your savings in a single company. If this one does badly in the stock market, you can lose all your money. No matter how safe the company seems, they are all exposed to market risks. Think, for example, of Banco Popular ,bought last June by Santander for a single dollar. Popular shareholders lost all the money invested.
To prevent this from happening, financial advisers always recommend investing by diversifying stocks. This means investing in several companies at the same time . The objective is that if one of them does badly, we compensate its losses with the benefits that investment in the other companies provides us.
Warren Buffet, an American billionaire and one of the best investors in history, explained that “diversification is protection against ignorance . ” Nobody can know for sure what is going to happen . There are social and political factors, natural catastrophes, terrorist attacks … that can turn the stability of the financial system upside down.
For this reason it is so important to diversify as a measure of prudence. Since each investment has its risk, investing in several companies at the same time we minimize the possibility of losing money, although this will always be present in any investment.
The idea of diversifying investments is to have assets that react differently to the same situation , so that the gains of some of them offset the losses of others. For example, investing everything in banks is not diversifying. Doing it only in companies related to the real estate sector, it is not.
How to diversify investments?
Good diversification should include:
• National and foreign values : thus, if a crisis affects a country, we can compensate it with the economic growth of other countries.
• From different sectors : if this time the crisis affects only one economic sector, we will compensate its losses with the benefit of others.
• With different financial characteristics : you have to find the best possible combination between profitability, risk and liquidity
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As you have seen, diversifying investments is essential. However, it is not something that any novice investor can do. In fact, even the most expert can make mistakes diversifying their portfolio. For this reason, there are investment funds.
Why an investment fund?
A global mixed investment fund , for example, made up of fixed income and equities from any product in the world, is a well diversified investment product, although it is not without risks. In reality, nothing guarantees our investment 100%, so the risk will always be present. The goal of diversifying investments is to minimize it, not make it disappear.
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Ultimately, if you have your savings in a safe place and you want to start getting a return on them, you should start investing, but not in a single investment product, but diversifying your portfolio as we have explained in this article.