How to Make Your Portfolio Varied and Secure?

Risk diversification can provide you with that security and protect your entire portfolio against losses. Therefore, as an investor, you should know how to most skillfully build your portfolio and make the risk so calculable.

The fact is: you can never completely avoid the risk

Risk diversification is certainly not one of the most exciting topics of the investment. Nonetheless, most investment professionals agree,  that diversification is the best way to achieve long-term financial goals while minimizing risk – even when there is no guarantee against losses, of course.

However, you can never completely avoid the risk , even if your portfolio is very versatile. So what do you need for a well-stocked, balanced portfolio? There are three main things to look out for to optimally spread your wealth:

  • Your portfolio should include a wealth of different financial instruments – such as cash, stocks, mutual funds and, if possible, real estate.
  • Your investments should be exposed to different levels of risk. You do not necessarily have to limit yourself to first-class stocks. The opposite is true: if you invest in different investment products with different returns, it is more likely that the total return will compensate for individual losses. However, this does not mean that you should fall for particularly risky investments (such as penny stocks ).
  • Invest in companies as diverse as possible. Thus, the unsystematic risk that you incur with several small companies in the same industry is as small as possible.

Another important question is how many shares should one buy to minimize the risk to his portfolio. The so-called portfolio theory says that with 10 to 12 different possible stocks is already very close to the optimal risk diversification.

That does not mean that your assets are well invested in 12 different stocks of the IT industry. Instead, you should pay particular attention to the size and industry of companies.

Conclusion: What matters is the balance between income and risk

Different personalities have a different tolerance threshold as far as the risk is concerned. The tolerance is not static – it will change in the course of your life. With age, risk tolerance usually declines as you face more and more financial obligations (including retirement).

Financial transactions are influenced by various risks. If you find the right balance between risk and reward, you can be sure that you will achieve your financial goals and still sleep well at night.