Diversification - Important Precautions When Investing
You have often heard the "pros" talk about words like risk management, diversification and longevity. You have understood that this is wise, but do not quite understand what diversification means? Why not put all the eggs in one basket? Let's take a look at what actually happens when we choose more savings products.
In advance of investments, you may want to lay out a plan, or an investment strategy. The purpose of this is to map certain limits for your investment, such as how much risk you can bear. If you think it can seem confusing to make a plan and map risk, feel free to contact one of us at Noon Invest. We have good experience with investment strategy and help savers daily to achieve their goals. When we talk about diversification, we really mean a way to spread risk. The way to do this we will look at in an example.
As early as the Middle Ages, the saying about all eggs in the same basket was used. Even though it was in a slightly different setting, the meaning was the same. Merchants who sent their goods with the same ship experienced that when the ship sank, the loss was great. All the goods sank to the bottom. Eventually they found out that it could be smart to split the goods to ship with more ships. In this way, they reduced the risk of high losses if one of the ships sank. This risk diversification is what we in "finance" call diversification.
A slightly more relevant example is investing in different markets that probably do not go in the same direction. For example. one can build up the portfolio and diversify it by investing a little in norwegian stock indices, interest rates, commodity indices and global indices. Then you have chosen to lay the eggs in different baskets, rather than just one. In other words, the point is to find investments that react differently to similar events, but that you are also satisfied with the risk-adjusted return. In financial terms, we call this a balanced portfolio.
Et praktisk eksempel på diversifisering
The image below is taken from our website and illustrates the portfolio we call Balanced. This highlights an example of diversification in the portfolio. It is important to point out that this is a very simplified presentation. In reality, several asset classes are used, and the image is simulated only to show a general allocation.
- Av Veronica Nesvik, Kundeansvarlig i Noon Invest