Portfolio diversification – how and why? | BNT Diamonds
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How can I diversify my portfolio the right way?

30 Jul 21

Depending on your life situation, very different approaches can be adopted with regard to investment, and your own personal risk profile will also determine whether the focus should be on capital preservation with inflationary adjustment, or generating the maximum possible returns, with the corresponding risk. Which forms of investment are right for you?

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What role does age play when choosing an investment?

For younger investors, after leaving school, while studying, or after completing their education, there is generally less capital available for investment. Capital preservation is often not yet on the agenda, and it is more a matter of building assets in the long term. At the same time, these investors have few responsibilities, as they generally do not yet have a family to provide for or look after.

At this point in time, investment that, while certainly diversified, places the focus on shares, ETFs and funds, makes the most sense. The stock markets fluctuate, but with a long investment horizon and constant investment you can take advantage of the cost-average effect. Sometimes you buy cheaper, sometimes more expensive, but ultimately you will profit from the continual global economic growth. Setbacks that last for a few years can be waited out without any problem during this life phase.

Couple enjoying their retirement

Middle age investors generally also have a partner to think about, and potentially children. They have more responsibility, and often a desire to purchase their own property. During this time, investment should be more conservative, and capital reserves should no longer be subject to overly severe fluctuations. Alongside properties, bonds and more diverse funds and ETFs increase in significance. An investment in raw materials such as gold or diamonds can also be a further pillar for the diversification of your portfolio.

At an older age, in particular after retirement, the goal of investment should always be asset preservation. It is no longer about achieving particularly attractive long-term returns or profitability, but rather the focus of the portfolio is to be as secure as possible, in order to protect yourself against short-term market crashes and crises. Such a portfolio will also include property, fixed bonds from reliable issuers, as well as movable assets such as diamonds or art.

What does a truly diversified portfolio really look like?

Diversification doesn’t just mean distribution – what is crucial is that the different forms of investment are as independent from one another as possible, and will not all loose value to the same extent e.g., in the event of an economic crisis.

An example: If you invest in different equity funds and shares, the risk will indeed be distributed across multiple companies. However, should a crisis occur, most industries and companies will generally be affected in one way or another. Your portfolio will collapse, in spite of investments being spread out. A good example is the 2008 financial crisis, whereby the collapse of the US property market ultimately also drove the stock markets into an abyss, many banks were on the brink of bankruptcy, and only massive state support running into billions avoided an even more severe outcome. It demonstrated how fragile a globally linked economic system can be, and how an individual trigger can bring about a chain reaction.

This is where genuine diversification comes into play. In the crisis year of 2008, for example, diamond prices were in slight decline, however, this movement was barely worth talking about in comparison to the turbulence seen in shares and property. Why was this? This was because the market for a purely physical product such as diamonds, which is not subject to speculation in the same way as gold, has few points of contact with the stock or property markets. This independence paid off.

So, the following rule of thumb applies: genuine diversification of your portfolio doesn’t just mean diversification within one form of investment, but rather distribution across different forms of investment, whereby these investments are not equally dependent on the same external factors in terms of their development.

Why must a portfolio be continually adapted?

Even if you have already effectively diversified your portfolio, over time, it can change of its own accord. For example, if you achieve profits in shares, this will automatically cause the proportion of your investments accounted for by shares to increase. If you purchase a property, this will often instantly account for a large proportion of your assets. This development often takes place unnoticed, and over years and decades, a well-diversified portfolio can thus fall into difficulty.

It therefore makes sense to review all of your investments once a year, to calculate their proportion of your overall portfolio, and, if necessary, make adjustments. This will ensure that you don’t give too much weight to one form of investment over a longer period of time, without actually intending to do so.

Are you interested in purchasing 100% natural diamonds with a view to diversifying your portfolio? The experts at BNT Diamonds would be happy to advise you. Contact us by email or chat or call our team directly on +32 3 201 24 90.

With this article, BAUNAT strives to inform you thoroughly about investing in diamonds. No investment can be guaranteed to be without risk or fully according to your expectations. That is why we recommend to research the risks and aspects of investing in diamond properly to ensure that you make the right choice for your portfolio.