Money secret No. 19: What is diversification?

Diversification is about putting your money into different types of investments, such as stocks, bonds, real estate and property, or commodities (e.g., gold). The basic idea behind diversification is that, overall, not all of your investments are affected to the same degree when things aren’t going well on the financial markets. For example, a global crisis can affect the financial markets and cause the value of your investments to drop. If your portfolio is diversified, it’s possible for it to feel less of an impact if it was divided among different investment types.

You can also achieve this kind of distribution by investing in different sizes of companies. For example, you can purchase large-cap stocks (from the largest companies in the world), mid-cap stocks (from companies with a market value between 2 and 10 billion euros), or small-cap stocks (from companies with a market value of 300 million to 2 billion euros). Small-cap stocks typically bring with them more risk than large-cap stocks, but they have a higher return in the long term.

You can also diversify across regions. That means that you don’t just have assets from your own country, but rather from different parts of the world. The advantage is that a global portfolio gives you access to many financial markets and companies throughout the entire world.

And finally, you can diversify by investing in different industries. For example, you could buy exchange-traded funds that are concentrated in cleantech (such as renewable energy), the technology sector, or even Cloud Computing.

With an ETF portfolio that allows you to invest in different types of investments and that is globally diversified, you’re off to the perfect start in building long-term wealth.

Money secret No. 19: Never put all your eggs in one basket when it comes to investing. With a wide distribution, also known as diversification, you can reduce risk.