There is a proverb: don’t put all your eggs in one basket. And it perfectly illustrates the main principle of investing – diversification.

To diversify means to place in your investment portfolio various financial instruments, namely:

assets of different classes (stocks, bonds, etc.);
assets of different industries (oil, gas, telecommunications, etc.);
assets of different geographical regions.
Why diversify?

An investment portfolio consists of assets, each of which generates a certain income. Income is associated with risks and depends on many factors: stability of the political situation, oil price, currency exchange rate and others. To protect the income, the portfolio should be diversified. If it consists of one type of asset, for example, shares of Chinese railroads, then in case of a coup d’état in China or a technological breakthrough in the field of aviation, losses are almost inevitable. If the portfolio is diluted with shares of, say, Gazprom and bonds of German telecom, i.e. with assets that are different in terms of geographical location, production sector and currency of payment, such a portfolio will be much more protected from risks.

By utilizing the diversification principle, many types of risks can be significantly reduced:

government risks, e.g. legislative change, political instability, coup d’état (solution: divide the portfolio by country);
economic risks, e.g. macroeconomic instability, periods of crisis (solution: diversify the portfolio by instruments – bonds, stocks, precious metals, derivative financial instruments with grain as the underlying asset);
risks of the segment to which the investment instrument belongs, e.g. stock market crisis (solution: securities with price movements opposite to the general market direction are selected for the portfolio; inclusion of different asset classes in the portfolio);
industry risks, e.g. a fall in oil prices (solution: investing in different segments of the same asset class, e.g. including shares of commodity companies, banks, telecommunication companies, IT in the portfolio);
risks of an individual company, e.g. bankruptcy, change of management (solution: including in the portfolio shares of several companies belonging to the same industry.

The easiest step for a novice investor is to buy shares of an open mutual fund (unit investment fund), because the share of one type of security in the shares does not exceed 10 percent.

You can create your own diversified portfolio by contacting a financial advisor at BCS Premier.