Investing in stocks and funds: how to properly diversify your portfolio?

Practical advice and explanations on how to properly diversify a portfolio for an investor?

Diversification is, in principle, understandable to any non-professional investor or trader. But, in practice, there are quite a few inputs that need to be considered when developing an investment risk diversification strategy.

It is possible to diversify assets within a high-risk sector of the economy and this will be fundamentally wrong. There are parameters of assets or stocks that change over time, such as capitalization, sector weight, share weight in the market (in the S&P500 index), stock Beta, volatility, these are actually variable values.

Naive diversification: Equal distribution of capital.

All these parameters can be taken into account when diversifying risk. Obviously, diversification should be by geography (by countries), by asset classes (which have different degrees of risk), by currency areas, by type of economy (developed or developing countries), by sectors of the economy and by industry.

As they say, the choice is huge, and if you add to all this the number of shares available for investment, then the scale of the complexity of making a decision becomes absolutely gigantic. For a non-professional investor, this becomes a problem, since it is necessary to make decisions based on a large number of factors that he is not able to analyze, interpret, assimilate and then regularly monitor.

Naive diversification (or a simple even distribution of capital) is a simple and straightforward way to distribute risk across different assets, sectors, and even countries. But is it worth doing all this when, in the end, the investor simply does not understand what benefits will be received from this, except for the risk diversification itself.

Non-obvious problems of naive investment risk diversification

Let's imagine that you made a naive diversification and distributed your capital among 12-15 assets, including shares of American, European, Canadian issuers in your portfolio. And what's next, can this be managed somehow? How will you analyze the result of the diversification performed? How can you answer the question for yourself whether my portfolio has received any advantages or not, what is the risk in my portfolio, what is the level of volatility?

Yes, it is not obvious at first glance, but if you cannot correctly calculate the parameters of risk and expected return, then how will you manage them and evaluate the effectiveness of the portfolio on the horizon of at least one year. And if for the same period the market gave a return of 5-7% per annum more than your portfolio? Did your portfolio perform better or worse?

The reason is that there are quite a few investment parameters that an investor needs to be able to count, understand and take into account when developing an investment risk diversification strategy.

It is also not necessary to exclude the fact that different investors need a different level of risk, a different level of profitability, a different structure of portfolio assets. All people are different and each has its own individual income situation, family circumstances, different levels of risk tolerance and different investment horizons.

It is not just capital that should be diversified, but the risk of the portfolio

A professional approach to diversifying an investor's portfolio is to distribute not just the amount of initial capital in the portfolio, but the risk. A portfolio is, in the professional language, an Asset Mix, or a unique combination of different assets that gives the best ratio of expected return and risk.

Our company, as an expert in the field of investment and finance, can correctly calculate risks, expected returns and correctly optimize portfolio parameters in order to obtain an investment portfolio suitable for a specific long-term investor. It is for a specific investor and taking into account its unique characteristics of expected return and risk.

We distribute not just capital, but portfolio risk, this allows, on the one hand, to have less risky assets in the portfolio, and on the other hand, to have more aggressive stocks in the portfolio, which give growth and a calculated contribution to the risk level of the entire portfolio.

The result of good investment risk diversification

As a result of high-quality risk diversification, a long-term investor can receive a unique investment portfolio that will meet his risk requirements, have a decent capital gain, and be optimally balanced in terms of risk.

Effective risk diversification is possible with optimal balanced values of expected return and portfolio risk. When comparing returns per unit of risk, a well-balanced portfolio will produce a higher return per unit of risk than the S&P500 broad market index. This is Alpha, which professional investors around the world are striving for!

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Are you dreaming of diversifying your portfolio by investing in US stocks? IQ Smart Capital invites you to its home page, where you will find everything you need to make this dream come true. Here you will get access to information about the most promising shares of American companies, and you will also be able to learn about investment strategies. Don't miss your chance for growth and prosperity!

Our Experts

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Zair Iusupov is an investment architect, a specialist in building portfolio solutions for private investors, business owners, HNWI and UHNWI clients. He has expertise in the field of financial engineering, portfolio investment risk management, strategic asset allocation and development of individual investment solutions.

He specializes in developing portfolio strategies for investors with capital of $300K–$5M+, combining in-depth macroeconomic analysis, fundamental assessment of US and European companies, Strategic Asset Allocation, Investment Policy Statement, a quantitative approach to risk assessment and long-term investment discipline.

Zair Iusupov

Founder and Chief Investment Officer

Wealth Management and Private Advisory (US, EU)

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