What are the advantages of portfolio diversification?
Diversified investment means that you spread your invested funds across various assets and asset classes, covering different risks and time horizons. By diversifying, investors mainly seek to minimize the inherent risk of investing money – and there are no investment instruments that are entirely without risk. ETFs, mutual funds, the stock market, quant hedge funds – all of these carry a certain amount of risk, especially when market volatility comes into play. A diversified portfolio helps to rebalance that volatility, generating steady streams of income with minimal risk.
Let's assume you have decided to spend a sizable amount of money on the stock market. You've identified air travel as a worthwhile investment field because you enjoy flying yourself, and you think the industry will only grow going forward. After a while, the stocks have indeed gone up, and your investment has paid off. But then, the COVID-19 crisis starts, and air travel is severely impacted by international emergency regulations. Your stock's value suddenly plummets, and your money may be gone for good. If you had invested some of your money into alternative stocks, you might have limited the amount you lost, or you might have made enough money from other investments to balance out your losses. This example shows the main benefits of diversification:
- minimizing risk
- reducing volatility
- generating a safety net
By definition, diversification is a method to minimize the financial risk inherent in investing, both systematic risk and unsystematic risk. Diversifying investments requires asset allocation in a variety of financial instruments, fields, and investment opportunities. This can also have the effect of maximizing the expected returns of your investment. Whether you invest in real estate, mutual funds, quants, or ETFs, diversification is one of an investor's most important tools.
If one of your investments falls short, you are not immediately out of the game as long as you maintain a well-diversified investment portfolio to balance out your losses.
What makes a diversified portfolio?
Diversification sounds easy enough – you could simply invest in some ETFs, some stocks, and a little real estate, and you're good to go. Unfortunately, it's not quite so simple. If all of your investments are in the same industry and this particular industry is hit by a market crash, you'll need to have investments in other industries to act as a safety net.
Diversification requires you to have a deep understanding of what you're investing in. From classic investment vehicles to alternative investments, there are plenty of options and directions to venture into. A properly diversified investment portfolio is built with the following factors in mind:
- different asset classes
- high-risk and low-risk investments
- varying time horizons
The three main asset classes are equity (stock market), fixed income (bonds), and cash equivalents. Additionally, investors have the opportunity to also invest in real estate, futures, and other alternative investments. Picking investment vehicles from all of these categories makes for sound asset allocation, which diversifies your portfolio.
Time is yet another factor to keep in mind when diversifying. You should combine long-term and short-term investments to generate income at any given point of time over a prolonged period. Time is also important for the risk level of your investments, as long-term commodities usually come with a lower investment risk. Short-term options, on the other hand, typically feature higher risk while also yielding higher returns.
When should you start diversifying your portfolio?
The sooner you start investing, the sooner you'll see returns – whether your portfolio includes single stocks, ETFs, or quant hedge funds. Using CARL for quant hedge fund investments is a straightforward way to get into the investment game. Accredited investors can install the app, set up an account, transfer the $20,000 minimum investment, and choose from our handpicked quant investment strategies.
Is over-diversification a problem?
Too much of a good thing can be detrimental – that is also true for diversification. Generally speaking, over-diversifying happens if the marginal loss of expected returns exceeds the overall benefit of the lowered risk. Let's look at a stock market example: owning one share in a particularly powerful company's stock versus owning a thousand. One single share may offer high returns at an increased risk level because your financial situation relies on this single share.
However, owning too many stocks may mean you benefit from lower risk – at the price of smaller returns, as you've spread yourself too thin. Despite eliminating the overall risk, your over-diversified portfolio consists of too many investment vehicles – high- and low-quality ones at the same time. This leads to your investment returns falling short. You are not generating maximum revenue, which could be possible with fewer but more strategically allocated shares.
Over-diversifying is detrimental to your financial goals. Analyze and assess all your investment options before adding them to your portfolio. Making informed decisions directly influences your financial future, and proper diversification is the key to financial prosperity. At CARL, we want to help accredited investors diversify their portfolios with a wide range of quant investment strategies, each of which can help you diversify your portfolio, thanks to the power of quantitative hedge funds.
Using CARL for investment diversification
Hedge fund investing has been an elusive investment opportunity for a select group of wealthy individuals and institutional investors. CARL aims to revolutionize the quant industry by making such investment strategies available to all eligible investors. Our app gives you total control over your investments. We offer different quant strategies with a wide array of methods and operating numbers to choose from. Also, we provide
- full transparency,
- maximum security and
- effective diversification tools
Our available data will help you make sound financial decisions. The CARL app provides you with everything you need to know, ranging from interest rates to past performance analyses.
One of the biggest perks of signing up to CARL is the ability to diversify your portfolio with some of the most interesting small quants available – some of which you might never have had on your radar before. We offer unprecedented access to quant hedge fund strategies for every kind of investor. But that's not enough for us. We actively seek out new investment options, assess them and add them to our selection if they meet our high internal standards.
Getting started with CARL is a walk in the park, and the first step is to set up a CARL account. To do that, you just have to qualify as an accredited investor.
- If you have an annual income of more than $200,000 on your own or
- more than $300,000 together with your spouse or
- have a net worth in excess of $1,000,000 (excluding primary residence),
you may qualify as an accredited investor, which legally allows you to invest in hedge funds. As soon as you have transferred investment funds into your CARL account, you can begin analyzing our quant strategies, pick the ones that pique your interest, and you're good to go!