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An investor building a diversified portfolio is like an acrobat walking on a rope. If you focus too much on high-risk investments, you risk losing everything and falling off the rope into the abyss.
On the other hand, if you invest only in stable assets, you will stay in place but not make any progress or profit. The key to success in investing, as in walking a tightrope, is to seek a balance between the two extremes.
You must remember that investing is an art, not a reflex reaction, so the time for disciplined investing with a diversified portfolio comes before diversification becomes a necessity. From my experience, by the time the average investor “reacts” to the market, the damage has already been done.
Here, as in most cases, the best defense is an attack, and a well-diversified portfolio combined with an investment horizon of more than five years can withstand most shocks. I’ll tell you what strategy I’ve developed for myself.
Where is the wind blowing?
I have a habit — every quarter, I update for myself a list of the main trends that are on the rise, investments that can bounce back as quickly as possible. Next, I follow these specific trends and all the projects that are moving in these directions. Perhaps there will be a golden goose among them. Today, sustainable investments, green energy and industries supported by artificial intelligence and digital transformation are among such trends that are gaining popularity.
However, let me remind you that it is worth updating this list at least once a quarter to make sure that some of the sectors have not lost their relevance due to political, economic and other reasons.
For example, the same green energy is constantly criticized for its high cost and inefficiency, so one morning we may wake up in a world where solar panels are seen as impractical or obsolete.
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Put eggs in different businesses
A well-diversified portfolio is not only a separation between risk and stability, but also between sectors, industries and regions. This gives you the opportunity to make profits in key markets while limiting the risks associated with economic downturns.
Now, as I said earlier, the topic of artificial intelligence is on the rise, so the demand for semiconductors has increased significantly. However, when investing in this business, remember that a problem in the supply chain can dramatically bring down the prices of goods.
Dividing investments between sectors such as technology, healthcare and energy, you can make profit on new trends without exposing your portfolio to excessive industry hazards.
It is also worth considering the region in which the business is located. For example, emerging markets may offer higher growth potential but also be more volatile.
Not just for once
If you think that you can put together a perfectly diversified portfolio once and continue to sit on a pile of money for the rest of your days, then I have bad news for you. Over time, due to market fluctuations, the asset allocation — the percentage of your investments in different types of sectors or businesses — will change.
To maintain your chosen asset allocation, it is important to rebalance periodically, redistributing some of the profits of your portfolio to other parts of it that may not have performed so well. By “setting up” your portfolio, you will be able to adhere to the world-old tactic of “buy cheap, sell expensive.”
I often hear from financial advisors that it’s worth making such a reallocation once a year, but I personally do it more often, at least once every six months. First of all, I have great pleasure in analyzing my assets. Secondly, it increases the accuracy and mobility of my portfolio. Thirdly, it allows me to stick to the strategy I initially chose.
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Be aware of yourself
First of all, each of those who make up an investment portfolio should examine themselves and honestly answer a few questions. The main one is: what are you like? One person may be brave and aggressive, another may be kind and charming. All your character traits will be reflected in strategy.
In addition, when forming a portfolio, you need to calculate the time frame approximately: after what time do you expect to make a profit? For example, a Mike Tyson-type investor won’t wait 20 years to make a profit; he wants everything here and now! Another option is if you have already started thinking about saving money for retirement. Then long-term planning is suitable for you.
There are no right and wrong preferences here; there is only what suits you by nature. If you are a gambler, you can invest in those startups that promise quick entry into the market and quick profits. Of course, such companies should also be checked in advance. Otherwise, it will be an investment, but just a waste of money. If you are melancholic at heart, investing in large and stable companies is more suitable for you.
