The benefits of diversifying your investment portfolio

Have you ever heard of investment diversification? This is a strategy that aims to reduce risks and increase the profitability of your portfolio, distributing your money across different types of financial investments.

But why diversify your investment portfolio? What are the benefits of this practice? And how to do this efficiently? In this post, we will answer these and other questions on the topic. Follow along!

What is investment diversification?

Investment diversification is the act of allocating your capital into different investment classes, types, terms and risks, seeking to balance the expected returns and the risks involved.

The idea behind diversification is that, by investing in different assets, you reduce dependence on a single factor or scenario to obtain good results. This way, if one of your investments performs poorly, you can compensate with the others that are doing well.

Furthermore, by diversifying your portfolio, you can take advantage of opportunities that arise in different markets and sectors of the economy, increasing your chances of obtaining a higher than average return.

What are the benefits of investment diversification?

Investment diversification brings several benefits to the investor, including:

• – Risk reduction: by investing in different assets, you reduce exposure to the specific risks of each of them, such as volatility, liquidity, credit and the market. For example, if you invest only in shares of a company, you are subject to fluctuations in the price of that share, the demand of buyers and sellers, the financial health of the company and the conditions of the sector in which it operates. If you invest in shares of several companies, from different sectors and sizes, you dilute these risks and make your portfolio more resilient to crises and economic shocks.

• – Increased profitability: by diversifying your portfolio, you can access assets with different appreciation potential, taking advantage of the opportunities that arise at each moment in the market. For example, if you only invest in fixed income, you may have profitability limited by the basic interest rate (Selic), which is at a historically low level. If you also invest in variable income, you can obtain greater gains from the appreciation of shares, real estate funds, cryptocurrencies and other assets that can benefit from economic growth and the recovery of sectors affected by the pandemic.

• Improved risk x return profile: by diversifying your portfolio, you can improve your risk x return profile, that is, the relationship between how much you expect to gain and how much you are willing to lose with your investments. In general, the greater the risk of an investment, the greater its potential return. However, this does not mean that you should take excessive or unnecessary risks to obtain a good return. By combining assets with different levels of risk and return, you can find a balance that is aligned with your objectives and your investor profile.

• Increased liquidity: by diversifying your portfolio, you can increase the liquidity of your investments, that is, the ease and speed with which you can transform them into money. This is important to ensure your financial security and to take advantage of opportunities that arise in the market. For example, if you invest all your money in a property, you may have difficulty selling or renting it in a time of need or low demand. If you invest part of your money in more liquid assets, such as government bonds or publicly traded real estate funds, you can redeem or sell them more easily and quickly, without losing much value.

How to diversify your investment portfolio?

Now that you know the benefits of investment diversification, you may be wondering how to do it in practice. There is no single formula or general rule for diversifying your portfolio, but there are some steps that can help you in this process. Look:

• Define your objectives and your investor profile: the first step to diversifying your portfolio is to define your financial objectives and your investor profile. Your objectives must be clear, specific, measurable, achievable and time-bound. For example, you might aim to buy a car in two years, take a trip in five years, or retire in 20 years. Your investor profile should reflect your level of risk tolerance, your level of knowledge about the financial market and your return expectations. In general, investor profiles are divided into conservative, moderate and bold.

• Choose the asset classes that make up your portfolio: the second step to diversifying your portfolio is choosing the asset classes that make up your portfolio. Asset classes are the general categories of investments, such as fixed income, variable income, investment funds, foreign exchange, gold and cryptocurrencies. Each asset class has its own risk, return, liquidity and taxation characteristics. The choice of asset classes must take into account your objectives, your investor profile and the economic scenario.

•  Define the asset allocation in your portfolio: the third step to diversifying your portfolio is to define the asset allocation in your portfolio. Asset allocation is the percentage distribution of your money among your chosen asset classes. For example, you may decide to allocate 50% of your money to fixed income, 30% to variable income and 20% to investment funds. Asset allocation must take into account your time horizon, that is, the period for which you intend to keep your investments. In general, the longer the term, the greater the exposure to variable income, which tends to offer greater returns in the long term, but also presents greater volatility in the short term.

•  Choose the financial products that make up each asset class: the fourth step to diversifying your portfolio is to choose the financial products that make up each asset class. Financial products are specific types of investment within each asset class. For example, within fixed income, you can choose between public bonds, private bonds, bank deposit certificates (CDB), real estate credit letters (LCI), agribusiness letters of credit (LCA) and others. Within variable income, you can choose between shares, real estate funds, equity funds, multimarket funds, derivatives and others. The choice of financial products must take into account the profitability, risk, liquidity and taxation criteria of each of them.

• Monitor and rebalance your portfolio periodically: the fifth and final step to diversifying your portfolio is to monitor and rebalance your portfolio periodically. Monitoring your portfolio means monitoring the performance of your investments and checking whether they are aligned with your objectives and your investor profile. Rebalancing your portfolio means adjusting the allocation of assets in your portfolio according to market variations and changes in your objectives and investor profile. Portfolio monitoring and rebalancing should be done at a frequency appropriate to your time horizon and investment strategy.

Conclusion

Diversifying your investment portfolio is an intelligent and efficient way to reduce risks and increase the profitability of your investments,  Investing in different assets reduces exposure to the specific risks of each one,  Diversification allows you to take advantage of opportunities in different markets and sectors of the economy . While one investment may be down, others may be up. This way, you increase your chances of obtaining a higher than average return.

Em resumo, diversificar é a regra de ouro no mundo dos investimentos. Criar uma carteira personalizada de acordo com seu perfil e objetivos financeiros é essencial para alcançar bons resultados e proteger seu patrimônio.