The market is unpredictable. But there are ways that investors can try to protect themselves against big changes in the value of their investments. One of the key risk management strategies investors use is diversification, or the practice of spreading money across a variety of different investments.
The idea is that the negative performance of some investments can be offset by the positive performance of others. In other words, diversification means you’re not putting all your eggs in one basket. While not a guarantee, diversification is a way to reduce risk in the long term.
To give a concrete example, if your investment portfolio is made up of one stock, and that stock’s value goes down 10%, your entire portfolio is down 10%. If your investment portfolio is made up of 10 equally valuable stocks and two lose 10% of their value and the rest remain unchanged, your portfolio only suffers a 2% drop.
Portfolios can be diversified in a number of different ways. Some common variables that investors will consider are:
- Asset class: the type of investment. Asset classes include stocks and bonds, which we covered, but also a variety of other investments you may have heard of, like commodities and exchange-traded funds (ETFs).
- Geography: The location of the company or country.
- Industry: The type of good or service the company offers.
And Qapital does all the diversification work for you! Each of our five pre-built portfolios is comprised of a mix of investments. You can see how we’ve diversified your portfolio right in the app! Just tap your Qapital Invest goal and Select Account overview to see how we’ve invested your money.
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