Diversification is the ultimate tool for avoiding complete investment losses. But how exactly do investors find the right assets to diversify into? And does diversifying come with any unintended consequences? Finally – is there such a thing as diversifying too much?
“Never put all of your eggs in one basket”
Unfortunate economic events have different impacts on different asset types. Which means that the investor who spreads their CHF 100’000 across multiple asset types exposes themselves to less risk than if they were to choose one alone.
Diversification is therefore important to most investors. But what is exactly is the process for finding assets that:
- Behave differently to an existing investment?
- Are likely to deliver a return?
Identifying assets that behave differently
When risk reduction is the goal, investors have little to gain from investing in an asset that behaves similarly to an existing one: