Diversification is a key element of a successful investment

Without even realizing it we use diversification in our day-to-day activities. For example, shopping in different stores or opening bank accounts with more than one institution

Imagine we open a stall to sell ice cream. There is no doubt we will be successful in the summer time and on very warm days but we certainly will sell less ice cream in the winter and on cold days. However, if our stall also sells coffee and tea we will be raising our chances of sales. This simile is a simple way to define the concept of diversification and how diversification works. In the world of investments, it is important to combine interesting assets that at the same time can work well together. In this way we will get good results for different situations.

Diversified investments can work well in different economic circumstances. If the oil price falls, it is very likely that dependent countries like Russia suffer deterioration of their economy. Meanwhile, highly dependent countries might even benefit. Similarly, bonds will perform well if the US growth slows down.

There are many elements that could have an impact in our investments. It has been proven that not even the best financial analysts are able to foresee the future outcome. This is especially true in the case of major crisis. No one anticipated the crash in 1929 and just a small minority saw the coming of the recent financial crises in 2008-2009.

Two important diversification criteria should be considered:

  • Geographical diversification.
  • Diversification into asset classes.

How to invest, Inbestme’s SCOPE:

S: System / Organization: it is essential to count with a system that ensures international diversification and diversification by asset classes. Diversification in large portfolios can be achieved by investing directly in different assets (stocks / bonds / derivatives) from different sectors or countries.  To create diversification in smaller portfolios it is advisable to use ETFs, combining different types of assets with exposure to different geographical regions. By merging different ETFs we can adapt any portfolio to each of the investor’s profiles and reduce the portfolios risk as well.

C: Commitment / Cost: ETFs are a highly efficient and low cost investment vehicle. It has been proved that reducing costs is a way of guaranteeing incremental returns. When we wish to invest directly in financial assets, it is important we invest from a platform so that we have access to any asset in any geographical region with the minimum transactional costs.

O: Objectivity / Independence: it is important to make sure we pick, with complete independence, the best assets for each type and region. Inbestme selects for our clients those ETFs that we have tested for our own portfolios.

P: Proactivity / Partnership: it is important to have a proactive and dynamic system so that we can adapt to different market situations. To understand our customers’ needs and to be in our customers’ skin is essential as well. Inbestme complements an efficient ETF selection with dynamic and proactive strategies. In other words, we conduct opportunistic inversions according to the market situation in order to maximize returns or reduce risks. We also apply intelligent rebalancing strategies that lead to greater returns and/or tax cuts.

E: Education: increasing our financial knowledge is also imperative. The better we understand how the world of investments works it is more likely that we will obtain better results.

Inbestme has started a sophisticated digital financial assessorial service as a clear low-cost high added value alternative to traditional investment services. Inbestme responds and answers to all of the challenges that small investors face in the market arena. If you are ready to invest with Inbestme, open an account and get to know your investor profile. If you are still not ready to invest, you can always keep learning with Inbestme about the basics of how to invest and follow our blog. We hope to help you so that you can have a better control over your finances step by step.

Index funds, etfs and pension plans

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