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Diversification is the main instrument of a successful investor

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According to «BCS Expres, 52% of Americans have assets in the form of securities. The U.S. government has created an investment culture, starting with school, where children are taught to invest, assess risks and make a profit. Every university has courses on investment. One of the main topics at such lessons is diversification of investment risks.

What is diversification?

Diversification means «diversity"». There are two ways to diversify.

The first one is related to diversification of the assortment. Let's imagine a factory that produces trams. When the demand for them disappears, the company will suffer losses. To avoid this, the plant launches production of more popular transport: electric buses and trolleybuses. Their sale will compensate for the losses from tram production.

The second direction of diversification is related to investment assets. To reduce losses and increase income, the investor distributes investments among different financial instruments: shares, bonds, currency. The task of the investor is to collect an investment portfolio that will bring profit regardless of inflation, currency rate, foreign policy circumstances, etc.

Ways to diversify the investment portfolio

Two factors influence the approach to diversification: risk level and profitability level.

It is important for the investor to understand that it is impossible to invest without risk and to get a big profit quickly. Therefore, it is necessary to combine reliable assets which bring small, but guaranteed profit, and risky assets which can bring the large profit in the portfolio.

Currency, stocks, bonds and shares in startups will help to diversify investments. You should also pay attention to professional investors' advice for choosing an investment strategy.

Currency

Risk: 2/5

Profit: 3/5

Foreign exchange investments are one of the most reliable ways to diversify investments. Investors keep deposits in different currencies to reduce losses due to exchange rate fluctuations.

For currency diversification of investments, you can choose one of six reserve currencies: U.S. dollar, euro, pound sterling, Japanese yen, Chinese yuan or Swiss franc. It is better to choose the currency that you use most often. In other words, if you do not plan to connect your life with Japan, you should not choose the yen.

Bonds

Risk: 1/5

Profit: 2/5

Another option for diversification is bonds. They are issued by companies or states. A bond is a loan that you give for a fixed term and get back with a percentage of the initial deposit.

Bonds  differ from other types of investments in the fact that timing and amount of payment of your income is known in advance. They are, therefore, less risky than, for example, stocks.

There are three types of bonds in terms of maturity:

  1. Short-term ones. Maturities are from 1 to 5 years.
  2. Medium-term ones. Maturities from 5 to 10 years.
  3. Long-term ones. Maturities from 10 years.

The most reliable bonds are issued by the state. They will bring a small income, but will still compensate for inflation. The reliability of government bonds is equal to the reliability of the borrowing country.

If the state is in political or economic crisis, it is better to take a closer look at corporate bonds, issued by companies.

You should not build an investment strategy just on bonds. The key economic law states that reducing risks leads to lower returns.

So, use bonds as an instrument of diversification. They will help offset the risk of losses from other securities.

Shares

Risk: 4/5

Profit: 4/5

Another way to diversify the risks of investments is shares. These are securities that are issued by companies to attract investments. The share gives the investor the right to own shares in the company, as well as the right to receive part of the profit in the form of dividends. The shares imply two common strategies for effective diversification of investments:

1. Distribution of shares by industry. Add to your portfolio shares of industries that are not closely related to each other. For example, shares in the agricultural business and IT sector. If one industry is in decline, another can make a profit.

2. Distribute shares according to the stability of the company. In addition to shares of large stable companies, add to your investment portfolio shares of young companies with a high risk of losses, but with a strong financial perspective.

Shares in startups

Risk: 5/5

Profit: 5/5

The biggest financial prospects are offered by high-risk investments in startups. For example, Twitter shares almost doubled after the first day of trading on the exchange - from $26 to $45. The SkyWay project offers similar financial prospects.

SkyWay is developing a new type of safe and environmentally friendly transport – string one. The string transport moves above the ground on high-strength rails, is not stuck in traffic jams and does not get into accidents, but at the same time, allows you to develop the speed of up to 500 km/h. The SkyWay engine is capable of running on electricity or natural gas: methane and hydrogen.

SkyWay is funded through crowdfunding. Every investor can get a stake in the company. Every investor can get a stake in the company.

The SkyWay development plan includes 15 stages of financing. As of 2019, the project is at stage 14.1. With the emergence of new transport models, the expansion of production, increased interest in the project from the media, SkyWay reduces risks for investors and a discount on the company's shares. Today, it is possible to invest in the project as a single payment from $ 50 or in installments from $ 250: by $25 monthly installments for 10 months.

According to the organization Startup Genome, 92% of startups do not produce the final product. Though SkyWay has not entered the market yet, the project already has objective achievements:

  • Five string-rail transport flyovers of different types with a total length of about 4 km have been built.
  • 10,000 square meters of production areas have been created
  • 16 different models of electric rail vehicles have been designed and manufactured
  • An innovation and transport cluster is being built in Sharjah (UAE).

Find out more about SkyWay clicking on Technology and Investments.

Ray Dalio's Diversification Method

Risk: 2/5

Profit: 4/5

Among the unusual investment strategies is the approach of Ray Dalio. The financier is known for founding the investment company Bridgewater Associates in 1975, which in 2017 entered the top ten largest hedge funds in the United States.

Ray Daglio advises investors to collect all low-risk positions in their portfolio.

  • 30% in stocks (blue chips or index funds)
  • 15% medium-term government bonds
  • 40% long-term government bonds
  • 7.5% in gold (or gold index) and 7.5% in commodity assets

In his diversification strategy, Rei Dalio considers two types of risks: economic growth and inflation. Corporate bonds are growing with positive economic indicators. Whereas government bonds are growing at negative rates. If inflation grows, investments are safest to keep in raw materials and gold, and if inflation falls, stocks and bonds become safe again.

Briefly about the ways to diversify investments

Currency. Exchange your roubles for dollars or another reserve currency to protect your funds from exchange rate fluctuations. This is a basic method of diversifying your investment risks.

Bonds. Invest some of your funds in government bonds to receive interest on your initial deposit with minimal risk.

Shares. Buy stocks of companies with high and low risk of losses, and pay attention to stocks of companies from different industries. This will allow you to get more stable income when some stocks go down and others go up.

Shares in startups. Do not invest only in stable companies. To diversify your investments, spend a small amount on shares in startups.

Remember! Ray Dalio's strategy.

Financier Ray Daglio advises to combine medium-term and long-term government bonds, as well as funds, converted into gold and raw materials, in the investment portfolio. In this way, you will receive a stable income regardless of the economic situation in the country and the world.

Nikita Zybin
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