What Does Diversification of a Portfolio Mean?
Diversification is a particular finance technique which reduces the risk inherent in investments. A diverse portfolio uses asset allocation to implement a fitting investment strategy to achieve the investor's goals in regard to risk tolerance, time frame, and targeted milestones.
Harry Markovitz pioneered the financial field with his Modern Portfolio Theory in the 1950s and even won a Nobel Prize a couple of years later for it. He argued that a diverse asset mix could achieve maximum portfolio returns instead of only focusing on high-risk or low-risk investments. Also, by evaluating a single investment's return and risk characteristics in regard to the whole portfolio, investors can identify different asset categories and achieve greater returns in their investment portfolio. This went against most investors' strategies at the time as they usually operated risk-averse. Especially today, a well-balanced portfolio covering various asset classes is key to yielding returns and growing your financial assets.
CARL offers a unique approach for creating and diversifying your income. Our app gives you access to various investment strategies and helps you identify quant hedge funds that might be precisely what you're looking for when diversifying your portfolio. Enjoy real-time performance updates and the freedom to start and stop investing at any time based on your monthly liquidity.
Understanding Different Types of Risk
Putting money into a savings account and watching the figures grow is an old-fashioned and slow way of increasing your capital – savings accounts simply don't offer interest rates high enough to create significant returns. Investing in a diverse portfolio, on the other hand, can provide higher returns but comes with inherent risk, which you will need to keep in mind when looking for fitting investment opportunities. Being able to analyze and recognize risk profiles benefits you greatly in the long run. To perform these tasks, you first need to understand the two different types of risk in the world of finance.
Volatility, "undiversifiable risk", "market risk", and "systematic risk" are all part of the inherent risk in market segments or entire markets. It affects all players in a field, never focusing on a particular company or industrial sector. Due to its nature, you can never completely avoid volatility as it factors in geopolitical, financial, and economic events which lie outside any possible market control instruments. "Beta" is the factor to identify a market's volatility in correlation to the investment's. A beta factor higher than 1 identifies the investment's inherent risk as higher than the market's systematic risk.
Nonsystematic or unsystematic risk is inherent to any particular industry or company. It factors in changes and events which investors might be able to identify to a certain degree. This includes policy changes, new competitors, or organizational restructuring. There are different types of unsystematic risk: business, financial, operational, strategic as well as legal, and regulatory risk. Unexpected changes in a company's efficiency, its capital structure, supply chain, or laws regarding their field of business can occur at any time. Diversification lowers these risks for your portfolio.
The Potential Downsides of a Diversified Portfolio
ETFs, stocks, REITs, commercial real estate – whichever asset categories you invest in, they are always united by one factor: they cost money. As all investors work with a self-imposed budget, it's crucial to consider additional costs like transaction fees or brokerage charges. After all, you invest to rake in rewards, and you don't want to be drowned in fixed costs that ruin your financial gains.
Investing in foreign stocks and other financial items requires you to have a deep understanding of various topics. This requirement is multiplied by portfolio diversification as you need to comprehend which financial products to pick and invest in. It's often necessary to spend many hours reading about the different products and maybe even gathering additional information outside the product's own prospectus. Meanwhile, CARL is an all-in-one solution to quickly get into a versatile investment portfolio with quantitative investment strategies.
Too much of any one thing is always detrimental – this is also the case for diversification. Over-diversifying can actively hinder you from trying to achieve your investment goals. The devil is in the details, though – diversification seeks to minimize risks while raising asset returns, but with too many assets from different asset classes, you are prone to ignoring the big picture. Optimal diversification aims for a broad enough spectrum of investments without losing oversight. CARL helps you stay on track with your investments while maintaining full control at any given time.
Lastly, there is no guarantee for portfolio return. Despite favorable projections, investing always means pitting your capital against different risk factors. You should consider this when looking to create revenue for your personal finances. A healthy budget that doesn't exhaust your full investment capability is a good starting point to stay on track. Also, you need to be able to spare assets tangled up in long-term growth-oriented investment products. Retracting your money from lower-risk financial products can be rather complicated and could be detrimental when you encounter short-term cash flow problems.
What Level of Portfolio Diversification Is Enough?
The bottom line for any diversification strategy is that you cannot eliminate risk entirely. Keeping this in mind, the goal is to find a happy medium between risk and reward from different asset classes. Investing in single stocks, ETFs, and real estate and rounding out the portfolio with quant hedge funds using CARL is a good starting point when looking for financial gain. Balancing high-yield, higher-risk assets with low-risk investmentsallows accredited investors to create and grow significant streams of income.
Using CARL for Portfolio Diversification
Accredited investors looking to set up a coherent investment portfolio have much to gain from using CARL. The platform makes it incredibly easy to add high-yield investment strategies to your existing portfolio or start a portfolio from scratch. Keep full control of your invested capital via the CARL end-to-end app and track the performance of your chosen hedge funds in real-time. Historically, allocating a quarter of your available capital in hedge fund investments generates more profitable returns while minimizing volatility. Start today by contacting CARL and setting up your personal account. Discover various strategies for portfolio diversification and start growing your wealth today.