10/11/2023
Diversification – the key tool for preserving, protecting, and growing your wealth over the long term.
Diversification is the process and actions (business and/or investment strategy) taken to reduce risk and enhance potential returns by expanding your company's operations into new or unrelated products, services, markets, or industries; or spreading your investment portfolio across different asset classes, industries, sectors, geographies or individual investments.
It means do not put all your eggs in one basket.
Invest your available funds among various assets or businesses such that if one asset performs poorly, the other assets will potentially perform better enough that the poorly performed ones will not negatively affect your overall portfolio.
Key Principles of Diversification:
a) Asset Allocation: Allocating available funds across different asset classes like alternatives (energy, commercial real estate, etc.), stocks, bonds, and/or cash equivalents is the starting point. Each asset class has its own risk-return profile.
b) Sector and Industry Diversification: Each asset class has its own sector business verticals (sub-sectors), and investors can further diversify by investing in different verticals of the same sectors; or in different sectors and industries. In carwash industry verticals for example, you can invest in carwash business operation, the facility (real estate), equipment manufacturing, chemical supply, repair & maintenance, payment systems (technology) etc.
c) Geographic Diversification: Investing in different provinces, states, and countries can mitigate the economic, and political including currency fluctuations (in case of cross-border investments) risks associated with your investments in a specific geographic area.
d) Company and Security Selection: Even within a specific industry or sector, you can diversify by investing in not just a range of individual companies but in different securities. You can invest in startup, growth or matured companies; or invest in public securities, private equity, or private debt; or invest in brownfield and/or greenfield projects
e) Risk Appetite & Tolerance Matching: Your investment choices should match your available funds, expected returns, risk appetite, and risk tolerance within the timeframe that you’re willing to wait. If you are a young investor, you probably have a long time horizon and more risk tolerance and, therefore have a more aggressive diversified portfolio appetite compared to older investors
Diversification CANNOT eliminate all investment risks. Do your due diligence and understand the risk-return profile of every investment opportunity, and do not over-diversify. Over-diversification (owning too many assets or investments) increases associated costs and might lead to poor performance.
