The term diversification  The term diversification comes from economics. In the financial sector, it refers to spreading capital as widely as possible across different markets, sectors, currency areas and securities. The aim of diversification is to reduce risks. comes from economics and means that options are increased and risks are reduced. In the financial sector, it refers to spreading funds as much as possible across different markets, sectors, currency areas and securities. This reduces the likelihood of backing the wrong horse and means that the performance of other securities can compensate for any security that does not perform as well as anticipated.

An example

As we don’t know how the weather will change in the next few months, we could invest in two companies, a parasol manufacturer and an umbrella manufacturer. This means we can make the most of any weather conditions, albeit not quite as much as if we’d invested correctly in just one company. However, we also reduce the risk of investing incorrectly. The same principle applies to the various investment classes, regions, countries, sectors or currency areas, as they are all dependent on other economic factors. The principle of the greater the diversity the better applies to diversification. However, this effect decreases from a certain point with each additional investment.

Diversification with a small amount of assets

If the investment amount is relatively low, it’s almost impossible to purchase enough different individual securities or assets and to ensure effective diversification in the portfolio . It can also require a lot of time and high fees to modify the weighting of the assets in line with market developments. This is where investment funds  A fund is a “pot” into which investors put money. This is invested by the fund management in various securities, such as shares or bonds, based on certain criteria. This means good diversification can be achieved even with a low level of investment. There are various types of funds: if a fund invests in shares, it is called an equity fund. Real estate funds invest in property. can help. Investment funds are bundles of individual assets with different investment objectives depending on your focus. Thanks to investment funds, investors can benefit from high diversification and potential returns  The overall performance of an investment compared to the capital you as an investor have invested in it. even with small amounts of money, geared fully towards their preferences. For example, asset allocation funds are offered. There are also funds which invest exclusively in certain areas, such as technology. Alternative investments such as real estate, gold or cryptocurrencies are another option for greater diversification.