Investments are almost always associated with a certain risk. Eliminating it at all is impossible, so it’s wise to think of ways to minimize it. And one way of minimizing risk is to diversify your investment portfolio. This is as important for a trader as a balanced diet is important for the human body. 💡
But what you might not know is that diversification is a method with roots long back in the history books. Let’s look at the 4 main stages of how the ideology of diversification has developed over time. 🕵🏻♀️
60:40 portfolios
In the 1970s, investors were mainly focused on just two types of assets – equities and bonds. The diversification, therefore, was mainly happening between the two. 60% of funds were usually invested in equities, while the remaining 40% were in bonds, as they proved to be effective in difficult times together with a reliable yield.
International diversification
In the 1980s, however, investors started placing their funds into international assets. This gave rise to international diversification and was to a large part attributed to the abandonment of capital controls and 1970s fixed exchange rates. The popularity of emerging markets also grew, forcing traders all over the world to invest in international equities and bonds.
The endowment model
In the 1990s, people started diversifying their portfolios across assets other than equities and bonds. For instance, David Swensen from Yale University was one of the first people to invest in hedge funds, real estate, commodities, and much more. This resulted in a 13% return per year. Interestingly, the popularity of this diversification type continued to grow and today almost 90% of all funds are invested in assets other than equities and bonds.
Factor investing
In the 1990s, the world also discovered that the returns from investment could be determined using “factors”. These are simple metrics, combined with technology and quantifiable methods. Some of the examples are the size of the market, valuation, growth rate, price momentum, leverage, profitability, and many more.
What about nowadays?
Today, it’s mostly a mix of everything, but the internet plays a huge role in how traders diversify their investments. And there is a huge variety of options available too – stocks, bonds, deposits, indices, precious metals, cryptocurrencies, NFTs – you name it, the list goes on. On NAGA alone, you can diversify across 1 000+ assets in 6+ asset classes.
Of course, there’s the other side of the coin too, namely that diversification may result in a lack of focus. Hence, many investors on NAGA are only investing in a certain asset – like XAU/USD, OIL/WTI, S&P500 – and mastering it to gain the maximum out of them.
How do you approach diversification, if at all? 🤔 Share your strategy with fellow traders and newcomers on the feed and gain new followers!
