How do I build an investment portfolio

Investment portfolio: also invest in diamonds for less risk

What is in your investment portfolio today? Stocks, bonds? Also raw materials like diamonds? It is very likely that you are at least considering it since you are reading this. Especially if you live in China or India. Correspondingly, 45% and 50% of the local population are considering investing in diamonds, according to the Global Diamond Report 2013 by the consulting firm Bain & Company.

They are right. Diamonds offer many advantages in diversifying an investment portfolio. For example, because their value has risen steadily over the years and is not sensitive to inflation. After all, they do not develop in parallel with other investment products. Hence, the gems seem ideal for applying the golden rule of investing: diversify, diversify, and diversify. What effect can the addition have on your investment performance?

  • Maximize the expected return on your investment portfolio, minimize future fluctuations.
  • Invest in asset classes that develop as independently as possible. Your fluctuations will then even out better.
  • By investing in stocks and diamonds, portfolios achieved at least the market return at a lower risk, according to a Norwegian study.
  • Diversification is the golden rule of investing: in different, unrelated asset classes, several economic regions and sectors ... and also diamonds!

The key to a successful investment portfolio

To get a higher return, you need to take a higher risk. No investor can avoid that. You must therefore choose a combination of risk and return. Once you have made that decision for yourself, it is important to maximize the expected total return for your portfolio while minimizing future overall fluctuations.

The traditional yet effective way to achieve success was provided back in 1952 by the American economist Harry Markowitz. Back then, he initiated an approach that sounds obvious today, but which was not the case at the time, and which even earned him the Nobel Prize in Economics in 1990.

The main idea behind his method is that for maximum return with minimal risk, it is best to invest in asset classes that develop as independently as possible. In technical terms: they correlate as little as possible with one another. Your individual future fluctuations can then be better balanced out, so that the overall risk decreases with the same expected return.

Diversify with investment diamonds?

One such asset class that does not correlate with other forms of investment could be diamonds, right? Is that correct? Does adding diamonds to an investment portfolio increase total return and decrease overall risk? We found an interesting study on this at the Norwegian University of Nordland. This is where the test is done: What is the effect of adding diamonds as an investment to a portfolio that invests in stocks diversified?

Three pairs of portfolios were put together for the study: the first pair focuses on developed countries, the second on the US, and the third on the so-called BRIC countries. The latter are the developing economies of Brazil, Russia, India, and China. Each portfolio invests in stocks, in a version with and a version without diamonds. The investments are already diversified, as will become clear below. The investment horizon was between 2005 and 2013, i.e. 9 years. Of course, the real numbers from that time were used for the investigation.

How are the investment portfolios composed?

  • Investment portfolio for developed countries (outside of the US): These were chosen because of the high credit rating (which form an opinion about the creditworthiness of the country), a stable outlook and an interesting per capita GDP. Then one strong industry per country was selected: Norway (oil and gas), Luxembourg (materials) and Singapore (telecommunications). This selection was based on global financial rankings such as Forbes Global 2000. Ultimately, in each of the selected sectors, investments were made in the stocks of companies that were performing best at the time.
  • Investment portfolio for the USA: For this country, selected according to the same criteria as above, a separate portfolio has been put together. After all, several American companies were leaders in most sectors at the time. The industries selected here were: Oil & Gas, Retail, Finance, and Telecommunications.
  • Investment portfolio for emerging markets: The choice fell on the BRIC countries: China (oil and gas), Brazil (oil refining), India (mining, crude oil) and Russia (banking sector).
  • The variants of both portfolios contain these diamonds: Cut quality: round; Carat: 1.00 to 1.49, color: D-K; Purity: Internally Flawless (IF) to Included, Category I1. Read more about the quality criteria for diamonds here.

The compilation of the portfolios was therefore carried out with the necessary specialist knowledge, as was the calculations to achieve their performance. Going deeper into these steps would lead us too far. If you want to know more, don't hesitate to look up the study yourself, but be prepared for some solid statistic.

Of course, the return and risk of the portfolios had to be compared with the market. The MSCI World Index was used as a benchmark for the industrialized countries including the USA. Contrary to what the name suggests, it only contains stocks from developed countries. For this reason, the BRIC portfolios were compared with the MSCI Emerging Markets Index.

What are the consequences of adding investment diamonds?

  • Investment portfolios for developed countries (outside the US): Here the expected return was 11% higher than the market return of 7%. The risk was better too: it was also 11% or 2% below the market risk of 13%. However, if there was also investment in diamonds, the overall risk was only 4.3%, which is significantly less than the market risk. The expected return was then 7% or the same as the market.
  • US investment portfolios: Without diamonds the total risk was 3.5%, with diamonds 3.2%. The difference was therefore small, but the risk in both cases was lower than the market risk, which was 13%. The expected return was 7% twice or the same as the market return.
  • Investment portfolios for emerging markets: If there were no investments in diamonds, the overall risk would be 24%. When it did, it was 7.2%, well below the market risk of 36%. The expected return in both cases was 14%, as was the market return.

Diamond effect demonstrated!

Of course, the performance of these portfolios makes no promise for the investments you are making today. We therefore do not provide any investment advice. What we want to show is the clearly positive effect of diamonds on risk.

The first portfolio for developed countries (outside the US) provided a lower risk than the market even without diamonds. It had already invested in three countries and three companies from different sectors. However, when you add diamond, you earn the same return on the market at an even lower risk.

Both portfolios for the US produced the same expected return on the market, but with a lower risk than that of the market. The difference in risk with or without diamonds was small.

Investing in the BRIC countries at the time meant more risk. But the diamond portfolio was much less risky than the market for the same return.

Still the beginning, of course

The combination of stocks and diamonds, as in the Norwegian study, is just the beginning of diversification. In order to optimally distribute your investment portfolio, you should also invest in other asset classes and in several economic sectors and regions. In addition, you should spread the investments over time, for example per month or quarter. So make sure that the assets develop independently.

Optimal investments to achieve an expected return versus a desired risk are not easy. For optimal diversification, you need to know exactly what your investment products are so that you can identify relationships between them. It is also important that you invest in those asset classes that combine to provide the risk and return you want. One investment is riskier than the other, but it can also be more profitable. But what is the right combination then?

You should definitely seek advice from your bank for the answer to this question if investing is not your daily passion. They may suggest choosing certain mutual funds. These products invest in different companies, sectors, countries ... so they do a lot of the work for you.

Add the secret ingredient

But: Financial institutions by no means add one thing to their portfolios that you now know the possible positive effect of: namely diamonds. The best way to invest is in BNT Diamonds.

We offer four investment opportunities, each at unbeatable sales prices on the market thanks to our smart buy philosophy:

  • Make your own choices from our certified, high-quality and guaranteed conflict-free diamonds, which you can then order online immediately.
  • Request a noncommittal offerif you cannot find what you want in the online offer. You will receive an individual offer within 24 hours.
  • Decide on a package certified loose diamonds tailored to your investment needs and budget.
  • Or invest in specialsalso known as Exclusives: exceptionally rare diamonds. It is best to invest long-term.

Convinced of the added value of diamonds for your investment portfolio? Add these gems today through our investment opportunities.

Author: Tom Dejonghe
Source: BAUNAT