Diversification - What risks are there when investing and how can I minimize them?

The biggest risk factor: Investing without a plan and structure

With a diversified investment strategy in particular, it depends very much on what you invest in, how much you invest and when you invest. It is not enough to simply buy stocks because the companies sound promising and the stocks are cheap right now. When diversifying, you try to counteract your high-risk investments with low-risk investments. You should therefore make a plan as to which stocks are eligible for your diversified investment so that, in the end, defaulting high-risk investments can be absorbed by low-risk investments. In addition to the risk tolerance of investments, the time horizon and return targets also play a role here. It also depends on whether you want to design your portfolio in a growth-oriented, income-oriented or stability-oriented manner.

Assess the risk

Every investment involves a risk. With every investment, you should keep a close eye on the risk and consider whether it is in line with the long-term goals of your investment strategy. Here, you should find the perfect balance between aggressive, high-risk investment and low-risk conservative investment. The balanced mix of both investment strategies ensures a balanced portfolio that remains stable over the long term. In order to be able to correctly assess the risk of an investment, it is sufficient to look at the investment prospectus. All essential information is compiled here. Here you can also find information on the risk assessment of the financial instrument. Financial products are usually divided into five risk classes, with risk class 5 being the highest risk of default. In particular, speculative and highly risky products such as derivatives are often listed in separate risk classes 6 and 7 by many banks and custody providers.

Acting emotionally is expensive

Investing always triggers emotions. However, you should keep cool, especially when dealing with financial products. Impulsive actions should be avoided. You can do this through a well-thought-out diversification strategy. Because even if share prices fall, you can offset price losses with a diversified portfolio. For example, if you have also invested in commodities or real estate, gains from these asset classes can offset losses from other classes. Selling stocks in a hurry or stubbornly holding onto them is not a good strategy when unexpected price movements occur. With the right diversification, your portfolio is significantly more stable and can compensate for fluctuations and defaults much better. You should always stick to your long-term plan and act rationally instead of emotionally with all purchases and sales.

The right diversification strategy

Risk minimization in investments is only possible through diversification. It is therefore of particular importance not only to invest in different risk classes, but also in different asset classes and financial products. By diversifying the investments in your portfolio and making them independent of each other, you increase the stability of your investment concept and minimize the risks of default and loss. A well-diversified portfolio therefore consists not only of low-risk and high-risk stocks, but rather of an investment mix consisting of bonds, commodities, stocks, mixed funds, index funds and real estate. In order not to be left defenceless at the mercy of possible fluctuations in individual industries, you should also invest in various markets. Cross-sector investments ensure risk-minimizing diversification in your portfolio.

For your portfolio, however, diversification does not ultimately mean maximizing returns. Because you can only achieve higher returns through higher risk. However, by diversifying your investments, you achieve return stability, which is essential for building up your wealth. Mutually independent investments in investments from different risk classes, asset classes and the use of various financial products are the success factors for stable and predictable asset growth.