Diversification - what is it and why it’s important Diversification - what is it and why it’s important Diversification - what is it and why it’s important

Diversification - what is it and why it’s important

Thought Starters 3 minutes to read

Saxo Group

Summary:  When you build a portfolio, it's normal to invest in what you know best - a few tech names you like or familiar stocks from your home market. But while that might give you a portfolio that feels comfortable, it's far from bullet-proof. Why? Because it lacks one key-element: diversification.


What is diversification and why you should diversify your portfolio

When you diversify your portfolio, you’re spreading your money across different investments. That means your total investment nest egg isn’t weighted too heavily in one thing – so, if your favorite tech stocks suddenly get volatile or your home market takes a dramatic downturn, your portfolio as a whole won’t be so vulnerable.

Less risk is just one benefit of diversifying your portfolio. Casting your investing net wider – across the globe if possible – also means you’ll be able to catch more opportunities in the financial markets.

Remember the skyrocketing Chinese stock markets in 2014-15? Or the Tesla rally in 2020? By flexing your investing muscles and adding a variety of assets, you’ll not only keep your portfolio more balanced, you’ll also be better placed to find new opportunities around the globe.

Holding a well-diversified portfolio does usually also lead to less volatile returns. With only a few investments, your portfolio performance is likely to differ significantly from year to year, while a broader range of investments tends to generate a smoother return development.

How to build a diversified portfolio

Making that initial choice to diversify is the easy bit but identifying what to invest in and the number of investments is slightly trickier.

Identifying what to invest in

As a starting point, you should consider holding a mix of various asset classes, such as equities, ETFs, bonds and commodities. Via investments in these different asset classes, you can gain further diversification by picking different types of individual investments within the chosen asset classes.

One easy way of doing this is to browse different asset classes and filter out investments based on different criteria. In SaxoTraderGO, you can use the screener function to find individual investments based on filters such as geography, industry, bond issuer and market capitalisation.

Another way of building a diversified portfolio is to apply a thematic investment approach, where you start picking a few investment themes, or long-term market trends, you believe in. In SaxoTraderGO and SaxoInvestor, you can find a big pool of long-term investment themes, which are handpicked for their future upside potential. The themes range from sustainability to digitalisation and come with inspirational investment lists, with instruments spread out across geographies, industries and company sizes, that give you a well-diversified exposure to the theme you believe in.

If you prefer to “buy the entire theme” over investing in single instruments, you can chose to invest in one of the related ETFs, which gives you an instant diversified  theme exposure through only one investment.

What is the ideal number of investments?

While there are different opinions about the optimal number of investments in a diversified portfolio, there’s no single correct answer to this question. However, as a general rule of thumb, most investors (both retail and professional) hold at least 15-20 instruments in their portfolio.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.