Why does Broad diversification reduce the risks

Each security develops individually according to its asset class and market and reacts very specifically to market changes. A wise mix of different assets, markets and sectors can balance out such fluctuations and protect the portfolio from major losses.

If, for example, you concentrate only on company shares in one sector (for example, from only one country or the entertainment industry), there is a high probability that all shares will lose massively in value in a negative phase. This is also referred to as a cluster risk.

There is no such thing as a perfect and crisis-proof portfolio. The chosen investment strategy is therefore always a compromise between the current factors and the declared investment objective.

Which strategy is the most suitable for you depends mainly on

•     the return you want to achieve
•     the risk of loss you are prepared to accept,
•     and how long you want to invest your money.

The individual relationship between return and risk primarily defines the general portfolio structure.

The investment horizon determines the range of possible securities and the percentage composition of markets and types of securities - the latter is also referred to as asset allocation.

Regardless of the chosen risk level, an asset allocation consisting of different types of securities and markets is essential. Why? Portfolios geared towards security receive additional stability with a broad diversification. In addition, passive income can be built up with distributing rather than accumulating ETFs and high-dividend shares. Yield-oriented portfolios, on the other hand, are better protected from excessive fluctuations in individual sectors.

In general, the higher the proportion of equities, the more aggressive the portfolio in exness fx broker and the higher the returns. Portfolios that are more safety-oriented therefore contain fewer equities and more bonds, real estate funds and commodities.

A higher share of equities also entails greater risks of loss. In the event of a crisis, a portfolio with 100 % shares can lose up to more than 50 % of its value. This can become a serious problem, because with a loss in value of 30% alone, the remaining capital must achieve a gain of at least 43% to make up for the losses suffered.

Note: Risk reduction for crisis phases is more important than maximising returns for good phases.

The spectrum of possible investment strategies is almost infinite and ranges from strictly conservative (minimum risk) to strongly aggressive (maximum risk). To better illustrate possible strategies, we will look at just these two characteristics in the following.

Portfolio construction for more security

If loss reduction is more important to you than profit maximisation, a particularly broadly diversified portfolio is right for you. As already mentioned above, corporate shares in particular increase the risk factor.

A conservative portfolio therefore contains no to few equity products - this includes ETFs and equity-based funds as well as equity savings plans.

Which securities are suitable?

The following assets are particularly suitable for custody accounts designed for safety:

•     Government and corporate bonds
•     Real estate funds
•     Gold

Bonds in particular provide the necessary stability and should be mainly represented in the portfolio with a share of up to 90%. Real estate funds are also considered stable, albeit more susceptible to fluctuations, and can be included in the same way as gold, which is considered crisis-proof.