Introduction to

Investment
Management

Submitted to: Manilyn T. Allado

Submitted by: Artemio F. Rosete Jr.

Nicole M. Pescador
The Benefits of Diversification in Your Investment Portfolio
When it comes to investing, there is no one-size-fits-all approach. What works for one person may not
work for another. This is why it’s important to tailor your investment strategy to your individual goals and
risk tolerance. However, there is one investing guideline that applies to everyone: diversification is key.

Diversification is an investment strategy that involves spreading your money across a variety of different
asset classes in order to minimize risk and maximize returns. By diversifying your portfolio, you are
essentially hedging your bets and ensuring that you will not lose everything if one particular investment
goes sour.

A well-diversified investment portfolio will typically contain a mix of stocks, bonds, cash, and other
assets. The specific mix of assets will depend on factors such as your age, risk tolerance, and investment
goals. For example, a younger investor who is looking to maximize returns over the long term may have a
portfolio that consists primarily of stocks, while an older investor who is nearing retirement may have a
portfolio that consists mostly of bonds.

No matter what your individual circumstances are, diversification is an important part of any successful
investment strategy. Keep reading to learn more about the benefits of diversifying your investment
portfolio.

Benefit #1: Diversification Reduces Risk

The first and most obvious benefit of diversifying your investment portfolio is that it reduces risk. By
definition, risk is the chance that an investment will lose value. When you invest in a single asset or a
small handful of assets, you are assuming more risk than if you were to invest in a larger number of
assets. This is because if just one of those investments loses value, your entire portfolio could take a hit.
On the other hand, if you have a diversified portfolio with many different types of investments, it’s less
likely that your entire portfolio will suffer if one particular asset experiences a downturn.

In other words, diversification helps you protect yourself against loss. This is especially important during
times of economic uncertainty when markets are more volatile than usual. By diversifying your
investments, you can rest assured knowing that even if some of your assets lose value, others may gain
value or at least hold steady.
Benefit #2: Diversification Increases Returns
Another benefit of diversifying your investment portfolio is that it has the potential to increase your
overall returns. This may seem counterintuitive at first, but it makes sense when you think about it. When
you invest in a single asset or a small handful of assets, you are putting all of your eggs in one basket. If
those investments do well, you stand to make a lot of money. However, if they don’t do well, you could
lose everything.
On the other hand, if you diversify your investments, you will have a better chance of making money
even if some of your investments don’t perform as well as you had hoped. This is because different types
of investments tend to do well at different times. For example, stocks tend to outperform other asset
classes during bull markets, while bonds tend to outperform during bear markets. By diversifying your
portfolio, you can take advantage of these trends and make money even when some of your investments
are down.

Benefit #3: Diversification Helps You Stay disciplined

One final benefit of diversifying your investment portfolio is that it can help you stay disciplined with
your investing strategy. When you invest in a single asset or a small number of assets, it’s easy to become
emotionally attached to those investments and start making impulsive decisions. However, when you have
a diversified portfolio, it’s easier to stay calm and rational during times of market volatility. This is
because you know that even if one of your investments loses value, the others may still be doing well.
If you're a financial or investment professional, consider learning about portfolio diversification.
Diversification is technique investors use to manage risks. Understanding portfolio diversification and its
types and benefits can help you make more informed investment decisions. In this article, we discuss why
to explore portfolio diversification benefits, explain portfolio diversification, outline its components,
describe its types, and provide its benefits.
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Why explore portfolio diversification benefits?

Exploring portfolio diversification benefits can help you decide whether to incorporate it into your
investments. While many professionals confirm it doesn't guarantee losses, it's a strategy to achieve long-
term financial goals. Diversification helps to maintain a balance between risk and reward. Rather than
concentrating investment in a single asset class, company, or industry, investors diversify across various
sectors. Consider reviewing the possible benefits of diversification to see how it can fit your investment
plans.
What is portfolio diversification?
Portfolio diversification is the process of investing in different asset classes and securities to minimize a
portfolio's overall risk. This practice helps reduce the volatility of a portfolio over time. The
diversification strategy involves balancing various investments with only a slight positive correlation or
an actual negative correlation with each other. Low correlation often means the investment prices aren't
likely to move in the same direction.

Components of a diversified portfolio

A diversified portfolio can contain the following elements:
Stocks
Stocks are the most common component of an investment portfolio and refer to a share or portion of a
company. Stock owners are usually part owners of the company. The number of shares an investor owns
determines the size of their ownership stake. Stocks provide significant returns because, as a business
makes profits, stockholders receive a portion of it as dividends. Investors can also sell stocks at higher or
lower prices, depending on company performance.

Bonds
Bonds often provide regular interest income and are generally less volatile than stocks. When investors
buy bonds, they loan money to the bond issuer, such as a company, agency, or government. Bonds usually
come with a maturity date for the issuer to pay the principal amount and interest accrued.
Alternative investments
You can also include alternative investments in a diversified portfolio. These include assets that can
multiply and increase a portfolio's wealth, such as real estate, oil, and gold. Investors typically trade these
less often than stocks and bonds.
Types of portfolio diversification
There are different methods of portfolio diversification depending on your investment goals. They
include:
Industry diversification
Industry diversification involves creating a portfolio of correlated industries with different risk profiles.
This can enable the portfolio to withstand various market changes. It's a part of the top-down investing
strategy that thematic investing also applies. Thematic funds are broader than sectoral funds as they allow
for diversification across multiple related industries. For example, an infrastructure-themed portfolio fund
can invest in steel, power, cement, or real estate. Likewise, an investor interested in the transportation
sector can hold multiple positions in the industry by buying airline and railroad stocks.
Individual company diversification
Evaluating investment at an individual company level is another common type of portfolio diversification.
Here, the portfolio manager can gain deeper insights into a company's needs and business operations to
identify those likely to correlate negatively. For example, suppose a prominent company leader leaves a
company for specific reasons. It can cause a huge impact and affect all investments related to the
company. Professionals often diversify across companies to reduce risks due to consumer preferences,
legislation, or acts of nature.
Asset class diversification
Asset classes react differently based on changing economic conditions. Different assets exhibit different
strengths and weaknesses in terms of risks and profitability. Investors may split their portfolios across a
few asset classes to mitigate financial risks. With the advent of technology and increased accessibility,
assets class entails more than stock and bond investments. Investors also invest in communities,
cryptocurrencies, precious metals, real estate, and other assets.
Geographic diversification
Countries operating with different monetary policies and currencies can provide varying opportunities and
risks. Geographic diversification is a method investors use to counter country and currency risks
effectively. They do this by expanding an investment portfolio across different physical locations to
minimize risk impact if one area is affected. This method of portfolio diversification enables investors to
participate in a more stable economy by gaining exposure to different economies and emerging markets.
Alternative asset diversification
In this type of portfolio diversification, the investor or portfolio manager seeks diversification by
investing in various instruments. The instrumental assets include venture capital, private equity, antiques,
or distressed securities. Alternative asset diversification is common when portfolio managers invest a
significantly high amount of corpus.

Timeframe diversification
This involves the duration that an investment operates. For example, a long-term bond with a longer time
frame may be riskier but often has a higher rate of return to compensate for the risk. A short-term
investment may be less risky and yield fewer returns.
Another example of timeframe diversification is a systematic investment plan. Professionals consider it an
ideal method to invest in equity and equity-related funds. Portfolio diversification with exchange-traded
funds (ETFs) can offer diversification across companies. By using a systematic investment plan, investors
can also achieve time diversification. This is a way portfolio managers combine different diversification
methods to reduce risk maximally.
Strategy diversification
Investors adopt various strategies to manage investment portfolios. Common strategies include:
Value investing: Here, an investor takes advantage of buying cheap assets due to valuation. Value
investing focuses on finding bargains in the market by searching for companies with profit potential but
currently priced below the standard market value.
Growth investing: This aims to promote growth by taking more significant risks, such as investing in
developing industries or new companies with more growth potential than established businesses.
Contra investing: This involves searching for opportunities in contrast to the prevailing market
sentiment at the time.
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Portfolio diversification benefits
Here are the significant benefits that portfolio diversification offers:
Preserves capital.
One significant benefit of portfolio diversification to investors is that it contributes to capital security.
This is especially essential for investors that want to preserve capital toward the end of their careers,
including retirees or professionals approaching retirement. Professionals that are new to investment may
also seek stability in their portfolios. Diversifying across asset classes can provide stability and help risk-
averse investors protect their investments against market volatility.
Increases a portfolio's risk-adjusted returns
Professionals also consider diversification a means to increase a portfolio's risk-adjusted returns. This
means investors are likely to earn greater returns through riskier investments. A risk adjustment return
usually measures efficiency to determine whether an investor is deploying capital effectively.
Diversifying a portfolio increases this ability by identifying the assets providing greater returns and those
requiring changes or adjustments. Diversified portfolios also offer better risk-adjusted returns because
when two portfolios provide the same results, the diversified portfolio often has less risk than a
concentrated one.
Helps mitigate the impact of market volatility
Diversifying a portfolio across various industries and asset classes helps mitigate market volatility's
overall impact. A diversified portfolio with investment funds in different companies can minimize
enterprise-specific risks. It also enables investors to rebalance portfolios and profit from market volatility
by diversifying their holding among various asset types. For example, while stocks are underperforming,
real estate and bonds can grow steadily.
Decreases monitoring time
Diverse portfolios are often more stable than concentrated ones, as not every investment gives negative
results concurrently. For example, suppose a professional invests their entire portfolio in only one asset
class, like equity shares. This means the investor focuses a substantial amount of time and attention on
monitoring that market to determine the best action to take next. Likewise, if they invest in only low-risk,
low-return instrumental assets, they can devote significant effort to increasing returns. Diversification
allows investors to find a balance between risk and return, decrease monitoring time, and focus on other
work core competencies.
Helps in compounding interest
Portfolio diversification often helps reduce possible portfolio drawdown during pressuring times in
capital markets. This helps ensure that few but significant adverse investment decisions don't affect your
long-term returns. Ensuring consistent returns on a long-term investment allows the portfolio to enjoy
compounding interest over an extended period.
Contributes to achieving investment goals
Many professionals invest to achieve specific financial goals, and diversification can contribute to
reaching them. The goals can be dynamic and require adaptable investment approaches to accomplish.
For example, suppose an investor aims to accumulate a substantial corpus for retirement in ten years, save
for their child's university tuition in five years, and enjoy yearly vacations. In this case, allocating all the
investment funds to one asset or company may not be sufficient to achieve the goals. An ideal mix of
assets across different companies or industries can more effectively fulfil the investor's objectives.

The Benefits of Portfolio Diversification

One of the most important characteristics of any investment portfolio is its diversity. Portfolio
diversification helps offset exposure in any single position, and helps investors protect themselves against
wide swings in key sectors.

Typically, traders diversify by trading both equities and bonds. But in times of market volatility, a
portfolio can greatly benefit by the addition of futures and options on futures contracts.

Futures and options on futures give market participants the opportunity to hedge against market risk by
sector and to raise and lower levels of desired exposure in times of anticipated and unanticipated event-
driven volatility.
Whether adjusting for economic announcements such as FOMC meetings, earning seasons or non-farm
payroll numbers, or guarding against unexpected macro events, futures and options on futures can play a
valuable role in hedging against risk and carefully calibrating market exposure.
Example
A market participant is invested in technology stocks and is looking to reduce exposure to expected
announcements that can create price volatility.
By taking a short position in the E-Mini NASDAQ futures market, and offsetting sector-specific
exposure, a market participant can protect against short-term downside risk and offset potential declines
around specific economic events.
Conclusion
Every investment portfolio is unique, and each trader’s diversification strategy should be carefully
balanced to the portfolio’s requirements.
The wide range of liquidity in futures and options on futures contracts provide the flexibility to diversify
any trading plan and can be personalized around each trader’s long-term investment goals.
Summary
Diversification is an important tool that all investors should use to help reduce risk and increase returns.
By diversifying your investment portfolio, you can protect yourself against loss, make money even when
some investments are down, and stay disciplined with your investing strategy. These are all critical factors
for success in any market conditions.
The bottom line is that diversification is a key part of any successful investment strategy. If you’re not
currently diversifying your portfolio, now is the time to start. And if you are diversified, make sure to
keep it up. It could be the difference between success and failure in the long run.

Take the Next Step!

If you’re looking for help diversifying your investment portfolio, we can help. At New Century
Investments, we are experienced professionals who can help you design and implement a diversification
strategy that meets your specific goals and needs. Contact us today to learn more about how we can help
you grow and protect your wealth.