Furthermore, this investment tool falls into the category of highly liquid assets. If necessary, stocks can be quickly sold, allowing investors to recover their initial outlay.
However, no experienced investor would commit funds solely to a single type of stock or bond. Professionals understand that an investment may not yield the expected returns; this could happen even if the funds were invested in one's own business. Yet, even in such scenarios, there is a risk of losing all capital.
To minimize the likelihood of losses, experienced investors diversify their risks. They allocate funds across several types of securities. With proper asset allocation, an investment portfolio can generate a reasonable income. Even if one segment does not provide profits, the other investments can balance and offset the losses.
So, how can investors effectively diversify risks when investing in securities?
To answer this question and provide insights into the investment tool, Sergey Tereshkin, the founder of OILResurs, has stepped forward. The entrepreneur is well-versed in this field and regularly monitors market indicators. To learn more about this businessman, consider visiting his personal web project: sergeytereshkin.ru.
Building an Investment Portfolio
To minimize risk, it is crucial to construct an investment portfolio correctly. Many novice investors encounter difficulties at this stage. This process is far more complex and labor-intensive than it may initially seem.
It involves several stages:
- Stock selection. It is essential to choose securities from various industries. This way, losses can be mitigated due to seasonal demand fluctuations, internal company issues, etc.
- Analysis. Continuous market monitoring and tracking stock fluctuations are necessary. If significant problems arise, it is better to dispose of the asset promptly rather than wait for the company to fail entirely.
- Accounting. Utilizing various software for personal accounting can simplify tracking. This can include specialized apps or standard Excel spreadsheets that enable users to set formulas and perform calculations. Consequently, investors will always have a clear understanding of their potential income and overall situation.
When forming an investment portfolio, the focus is on securities that, in aggregate, can provide good returns.
Simultaneously, it is crucial to recognize that the more stocks purchased, the higher the risk involved. Tereshkin recommends acquiring no more than ten types of securities, ensuring that the companies are from different industrial sectors. These may include stocks from metallurgical plants, food production companies, logistics organizations, financial institutions, and more. The key is that they must not respond identically to changes in the market or political and economic spheres.
Funds should be optimally distributed across all investment instruments to avoid losses or minimize their likelihood.
Diversification Features
Diversification of the investment portfolio should ideally commence even before its creation. Before buying stocks, it is critical to analyze the market thoroughly and decide on the instruments that are the best investment options at any given time. This includes considering the risk levels and expected returns for each sector. Only after this analysis should investors proceed with purchasing stocks and allocating funds overall.
It is vital that all investment tools collectively provide the investor with maximum returns. If the value of certain securities declines, other segments should either remain stable or, conversely, appreciate in value. For instance, securities can be combined with precious metals, real estate, currencies, and other asset classes.
When selecting stocks, it is advisable to heed the recommendations of experienced investors. Professionals typically suggest:
- Select securities from companies that operate not only across different industries but also in various countries. This significantly reduces the risk of identical factors influencing the stocks. It is unlikely that a crisis in one country would adversely impact the industry in another. Even if the prices of some stocks decline, others will likely gain value. This can help offset losses and provide profits.
- When choosing securities, consider correlation factors. This indicator shows how stocks react to the same external factors. A special coefficient is used for calculations. A coefficient above 0 indicates that different types of securities will behave similarly under similar influences. A zero coefficient signifies no dependence between the stocks, while a negative figure denotes that the prices will move in opposite directions under the same circumstances.
In other words, it is preferable to select stocks with a correlation coefficient that is zero or negative. In such cases, a decline in the price of one security will not lead to a decline in prices for other securities.
It is essential to understand that the more capital invested in stocks, the more responsibly one should approach diversification. This strategy will help reduce risk, maintaining the necessary attention throughout the entire duration of the investment portfolio’s operation.
