Investment diversification is an attempt to reduce investment risk by investing our money in several different assets. That way, if one of the assets we have experiences a price decline, other assets that experience price increases can cover the losses experienced.
There are several ways we can do to diversify, for example by investing in different asset classes, in different regions, or investing in the same asset class but in several different companies. For those of you who are curious about how to make the right investment diversification, let's read Pintu's article about investment diversification below!
Definition of Investment Diversification
Investment diversification is an attempt to compile an investment portfolio with several types of assets that have different levels of risk and return on investment. Investment diversification can help investors to protect their portfolio from various risks that can affect investment performance.
For example, if we look at a company that is in the energy sector, we will see a drop in price when the price of oil falls. However, if you own shares in other industrial sectors, then the decline that occurs will not appear too large or even increase.
As was the case with the Covid-19 pandemic that we just experienced where we saw a decline in performance in the tourism and aviation sectors, but we saw an increase in the pharmaceutical sector.
Investment diversification does not guarantee that we can avoid the risk of loss completely, but we can mitigate the risk. Examples of risks that can be minimized by diversifying investments are inflation risk, interest rate fluctuation risk, geopolitical risk, and other risks that can affect macro and micro economic performance.
The Best Way to Diversify Investments
Investment diversification has long been done to maintain portfolio performance, especially when in a bear market (a trend of declining market performance). The benefits of investment diversification are felt especially during recessions, for example the dot.com crash crisis, the Great Depression, the property bubble, and the last one we experienced, Covid-19.
We must remember that an investment strategy is a strategy that requires discipline, not a sudden reaction that we just do when a recession is in sight. It can be said, when investors react to the market, we have felt 80 percent of the losses. Therefore, diversification is something we have to do from the first day we invest.
Starting Investment Diversification
Some of the things we can do as a step for investment diversification include:
Understanding Investment Correlation
Even if you have a number of different assets in your portfolio, if these assets move up and down simultaneously, that cannot be said to be investment diversification. You have to make sure you don't only invest in different industrial sectors, but also make sure there are different ups and downs of your assets.
That's why you have to have assets that have an inverse correlation with each other, for example, stocks and bonds. Generally, if the price of a stock index increases, the price of bonds will decrease.
Diversify Across Asset Classes
Asset classes are divided into two, equities such as stocks, and fixed income such as bonds. Your portfolio must have these two asset classes in order to show good diversification performance. You can also add physical assets such as property depending on the risk profile you have.
Diversification within One Asset Class
Some world investors such as Warren Buffet diversify in one asset, namely in shares of United States companies only. This is due to the trust he has in American companies and his principle of staying away from all investment instruments that he does not own.
Diversification across Regions
Diversification across asset classes is not the only way to protect assets from price fluctuations. You can also buy assets or shares from other countries so that if shares in Indonesia experience a decline, the increase in other countries' stock prices can cover the losses suffered. You can invest across regions by utilizing cryptocurrencies, because basically cryptocurrencies are more global because they are not owned by any country.
Explore Alternative Instruments
You can explore the potential for investment in other assets such as land, stocks, mutual funds, deposits, and others. If you are looking for an investment alternative that provides greater returns, you can consider cryptocurrency. However, you should know that cryptocurrency is a high-risk instrument, so you still have to balance your investment portfolio with more stable assets.
Besides that, choose cryptocurrencies that have good fundamentals such as Cardano , Polkadot , Ethereum , and Bitcoin . Also make sure you choose an investment platform that is user friendly and registered with Bappebti so that the funds you invest are safe, namely the Pintu platform whose application can be downloaded through the App Store or Play Store .
Sometimes the performance of one asset and another shows different progress. For example, if your portfolio consists of stocks and bonds. Generally, within a period of more than five years, stocks will show higher performance than bonds. This will make the proportion of shares in the portfolio that you have more.
Too many proportions of shares expose you to more risk than you can anticipate, so you feel uncomfortable. You can sell some stocks and buy more bonds so that the proportion of stocks and bonds returns to the ideal proportions.
Know the Risk Profile You Have
Risk profile is the level of tolerance you have in dealing with fluctuations in asset prices. The higher the risk you can take, the more aggressive the investment strategy you can execute.
Aggressive investors have a portfolio structure consisting of 90 percent stocks and 10 percent bonds. Aggressive investors expect more profits and can anticipate higher risks.
Moderate investors have a portfolio structure consisting of 70 percent stocks and 30 percent bonds. Moderate investors expect more reasonable returns and risks.
Meanwhile, conservative investors have a portfolio structure consisting of 50/50 percent of stocks and bonds. Conservative investors prefer safety over profits.
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