The Importance Of Investing By Diversifying
Investing is not a far-fetched process. It must be done with awareness, possibly first educating yourself about what you are talking about, and relying on the care of an investment professional, the consultant.
This figure will help us to invest our money in the best way, starting by diversifying the investment, in order to reduce its risk.
Investing is a process that must be done by fully understanding what you are doing, that is, having a correct financial education. Not only that, but it is not something that you can do alone, so it needs the help of stock advisory services which carries out targeted financial advice.
Diversification reduces the risk of any portfolio, no matter how it is composed. Obviously, there are more or less risky portfolios depending on what they contain, but their risk can always be reduced by diversifying them.
Of course, a simple example is enough to demonstrate this. Let’s take two portfolios, A and B, one consisting of only 1 stock, and the other of 5 stocks, including the stock of the first portfolio. If the company contained in portfolio A goes bankrupt, the holder of that portfolio will lose everything that he had invested in it. Portfolio B, on the other hand, would lose only 20% of its investment.
It is clear that diversification protected the second investor over the first, because investing in five stocks is certainly less risky than investing in just one. This is because the percentage that all five fail is infinitely higher than the percentage that only one can fail.
Not only. The returns of the 5 stocks, however similar they may be, are certainly not 100% correlated, because they are five different companies . It is precisely this decorrelation that reduces the risk of any portfolio, allowing the total risk of the transaction to be split.
The importance of diversification for returns
We have seen that diversification reduces risk and why. This splitting also has another effect. It allows those who operate on the market to be able to predict with greater precision the result of a given investment (never 100%, of course, because no one can predict the future, but only have a reasonable chance of what could happen).
This forecasting ability makes it possible to better assess the risk, and therefore the return, of an investment. And it is extremely important for managers, that is, those who invest the money of savers who rely on investment advisors.
In practice, it is precisely the reduction of risk that allows the investor to obtain a better performance, minimizing the negative trends of companies that fail and exit the market, and maximizing the positive ones of those that make it and are present in the portfolio.
The portfolio advisory services in India decides where it is better to invest capital for an individual or legal entity. In addition, he maintains control over existing investments in order to maximize profits. Its main task is to justify the client’s trust, namely to invest his money as efficiently as possible.
The portfolio is the entire set of investments: real and financial. Accordingly, it is in the competence of the Portfolio Advisor Services to make decisions about how, where and how much to invest and how to manage these investments later.