How diversified should my investment portfolio be?

Why it is worth carefully analyzing your investment portfolio

No risk, no fun?

In the 1950s, the US economist Harry Markowitz examined the behavior of stock markets and what conclusions can be drawn from this for investors. In 1990 he received the Nobel Prize in Economics for his work on modern portfolio theory. What are the key observations and how can an investor use this knowledge today?

If you have a certain amount of money to invest, you would probably not just buy a single share and put everything on one horse. You would make several different investments purely intuitively. This already describes the principle of diversification. Since different stocks have their own price trajectories and fluctuate to different degrees, the price loss of one stock can be compensated for by the profit of the other.

But why shouldn't you completely exclude stocks that fluctuate strongly from your investment decisions anyway, because the risk here is obviously relatively high? Your investment horizon and your individual risk profile are particularly important here. Stocks with increased price risks should reward these risks with higher returns in the long term. The higher the risk, the higher the return the investor can expect.

 

What should I buy and how much of it?

From a number of 15 to 20 stocks in a portfolio, according to the portfolio theory, a sufficient degree of diversification is achieved and the risk of a really bad stock in the portfolio having an irrevocable negative impact on the total return is minimized. Sectors, regions and currencies can of course also be diversified with additional stocks.

What proportion each share should have in the portfolio also depends heavily on the individual risk profile of the investor. Theoretically, you could give a share 50% weight and the other 50%, for example, split over another 19 stocks. In very few cases, however, this will be optimal. The weightings of the individual stocks can be mixed, adjusted and tried out as often as possible with technical help. This results in a large number of investable portfolios with very different risk-return characteristics. According to portfolio theory, these portfolios are called “efficient” if there is no other constellation of equity weightings that promises a higher return for a given risk profile. Investors should definitely have this risk profile determined by their investment specialist.

Can I still sleep well?

In the case of the individual risk profile, the focus is on the expression "individual". Every single investor has different needs, because on the one hand they have acquired wealth in different ways and, depending on factors such as age or family circumstances, they have very different investment horizons. There is also a psychological component. One investor can sleep well when the valuation of his stock portfolio fluctuates sharply. Another is very concerned when the market goes up and down. The experience already made with financial investments and the level of knowledge of the investor then round off the risk profile and result in a personally designed investment concept.

Portfolios can be optimized through the right stock selection and weighting, so that the investor expects a higher return with the same risk.

What are my investment goals?

The investment concept is a plan for the financial future based on the current distribution of assets as well as future income and expenses. Questions about an imminent retirement, the associated dissolution of the pension fund, major purchases and the amount of money that is required monthly for living are clarified in detail. This creates a clear picture of financial needs for the next five years and beyond. Only assets that will not be needed or consumed in the next five years are available for investment in financial assets in accordance with the risk profile in optimal portfolios. The relevant investment horizon is given here and potential price fluctuations cannot put the investor in trouble.

 

So, not only in theory, but also in practical terms, it pays off for an investor to develop their risk profile, pursue an investment concept, optimize their investment portfolio and then remain true to their strategy over the long term. The best thing to do is to seek advice from an investment specialist.

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All information is suitable for information purposes and does not replace advice, an investment proposal or a recommendation from BLKB.

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