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Diversification as a Principle

Diversification in money investment

Financial professionals systematically overestimate their forecasting ability. Our focus is therefore to construct solid portfolios using broad-based diversification and the tendency towards equal weighting of individual positions. Spreading risk across a comprehensive number of securities is an important element of our successful long-term investment. Cluster risks are also consistently avoided in all our investments. We also implement diversification on the time dimension by building up the portfolio in stages. Because also the professional can’t find the perfect time to enter the market, and if he does then only due to a lucky strike.
How many positions do I need for good diversification?

You know the saying: Don't put all your eggs in the same basket! The same applies to shares and bonds; the shares and bonds of each individual company should not endanger the portfolio in case of an unexpected misfortune. The diversification of investment risk is the only insurance available which is free of charge. In the case of shares, it can be scientifically proven that your portfolio has a solid risk diversification from around 20-25 positions of international high-quality companies. However, the number of securities used depends on the size of your portfolio and increases with increasing volume. To further increase the stability of your portfolio and to avoid cluster risks, we tend to weight the individual securities in the portfolio equally.

Does equal weighting bring me an advantage when investing money?

We tend to weight the individual stocks in the portfolio equally and not according to their market capitalization. This means that approximately the same amount of money is invested in all positions. If investments were made according to the usual market indices, the United States of America alone would have an exorbitantly high weighting in a stock portfolio. The three heavyweights Nestlé, Novartis and Roche in the Swiss equity segment would generate similar cluster risks. This would run against the primacy of risk-optimal diversification. In addition, various scientific studies have shown that simple equilibrium weighting produces more efficient and stable portfolios and thus better long-term results than other weighting rules.

What are the benefits of time diversification?

If you invest your long-term available financial assets in one go, there is a risk that you will lose a significant portion of your initial assets within a short period of time, in the event of a sharp market contraction. For this reason, it is generally advisable to build up your portfolio gradually over time. This makes it easier for many investors to access equity investments, as it avoids the risk of the worst possible time to enter the market, and there is a great opportunity to benefit from corrections through anti-cyclical purchases. With this method, temporary corrections are even desirable, as it is possible to profit from lower initial prices.

Is there no need for other investments to improve risk diversification?

Most financial advisors promote, in addition to equities and bonds, a variety of other investments such as infrastructure investments, hedge funds, private equity, structured products or financial products on commodities for the purpose of allegedly improving diversification. Since all these investments involve similar risks to equities, but are less profitable, extremely expensive, non-transparent and illiquid – i.e. hardly saleable in times of crisis – in contrast to the original shares, these products do not bring you additional benefits. They primarily serve to make their providers rich.