Diversification is an important aspect of trading and investment, which helps to reduce risks and increase the likelihood of achieving long-term financial success. It involves diversifying investments into different asset classes, industries, and geographical regions, rather than concentrating them in one area.

Diversification enables investors to avoid the trap of putting all eggs in one basket and helps to minimize the impact of potential adverse events in specific markets. Diversified investment portfolios can potentially generate more stable returns, protect capital, and create better risk return rates for investors.

Therefore, diversification is the fundamental strategy for achieving long-term financial goals for all investors, regardless of their level of experience. But like many things, this is easier said than done. So how can we put it into practice? Here are some tips:

What is a diversified investment portfolio?

NASDAQ defines it as an investment portfolio that includes various securities, so the weight of any security is very small. The risk of a diversified investment portfolio is very close to the systemic risk of the entire market, and the non systemic risk of each security has been dispersed from the investment portfolio.

This means that diversified investment portfolios should not be randomly selected asset lists. Simply selecting any investment is not enough. A fully diversified investment portfolio should typically include various securities to help reduce personal safety risks and align with the systemic risks brought by the entire market.

In short, to establish a fully diversified investment portfolio, you first need to select your investment across a wide range of asset class portfolios, so that risks will arise based on the different sizes and intervals of the selected assets. To leverage the benefits of diversification, target various asset classes:

Stocks, also known as equity; Allow you to have partial ownership of the company

Bonds, also known as fixed income securities or debt instruments: You borrow money from a company or government in exchange for regular interest payments

Alternative investments: investments that are less correlated with the stock market (real estate, commodities, hedge funds, cryptocurrencies)

When the correlation between your investments is low, a healthy level of diversification will compensate for the poor performance of one asset while the performance of the other is stronger, thus potentially reducing overall risk over time.

How you allocate investments between assets is called asset allocation. Your allocation should be based on factors such as your financial goals, time frame, and risk tolerance. Investors with high risk appetite and/or longer investment time can benefit from more aggressive asset allocation.

Consider investing in ETFs

If you don't have enough time to study individual stocks, you can consider adding passively managed funds to your investment portfolio, such as exchange traded funds (ETFs). ETFs provide a basket of securities that can help you complete diversification work, especially if you combine several unrelated ETFs together. There are many types of ETFs covering stocks, bonds, commodities, and even currencies. Adding an ETF to your investment portfolio can also significantly diversify your investment portfolio. Compared to mutual funds, the fees of ETFs are often lower.

Regularly rebalance your investment portfolio

Investment is an ongoing process that requires conscious adjustments over time. Once you have the ideal asset portfolio, please promise to maintain it through regular checks and rebalancing. Over time, the weight of each asset class will vary based on your investment return. This has changed the risk profile of your investment portfolio, making rebalancing an important component of managing investments.

Regularly comparing your starting point and current position, and determining whether performance meets your long-term goals, is very helpful. After completion, you should ensure that your exposure to certain asset classes is within the level of risk you envision. If not, please rebalance any assets that deviate from the required asset allocation. The following are some portfolio examples that illustrate various asset portfolios based on different goals and time frames:

Conservative investment portfolio: 20% stocks, 50% bonds, and 30% short-term investments.

Balanced investment portfolio: 50% stocks, 40% bonds, and 10% short-term investments.

Growth portfolio: 70% stocks, 25% bonds, and 5% short-term investments.

Investing allows your funds to serve you, helping you accumulate wealth over time and reducing the impact of inflation. The earlier you start, the more you can gain the power of compound interest to help you achieve your goals. More importantly, establishing a diversified investment portfolio will cultivate financial discipline, savings habits, and a deeper understanding of investment tools.

Establishing a diversified investment portfolio starts with selecting your investments across a wide range of asset classes

Regional advantages

The recent successful initial public offering of securities on the Dubai Financial Market and Abu Dhabi Exchange has provided investors with a variety of financial instruments based in the Middle East and North Africa to choose from. These include listed stocks, derivatives, ETFs, and bonds. Today, novice investors in the United Arab Emirates can choose from multiple providers and embark on their journey.

In summary, diversification is a key aspect that cannot be ignored in transactions. It involves diversifying investments into different asset classes, industries, and markets to minimize risk and increase the potential for long-term returns.

Through diversification, traders can protect their investment portfolios from market fluctuations and reduce their exposure to any particular investment. However, investors need to continuously accumulate knowledge of many available tools and choose tools that support their goals.