A comprehensive and practical guide to investment diversification

In a period when the market is rising and it seems impossible to lose, it can be tempting to bet everything on a single card - that is, to invest all your money in the currently most attractive asset. But because we can never predict exactly what the market will do in the next moment, a well-diversified portfolio is extremely important. Read on to find out what diversification is, why it matters and how exactly to go about it.

What is diversification?

The idea of diversifying investments (portfolio diversification) rests on the fact that a varied mix of investments potentially brings a higher return and reduces the risk of loss. When you diversify your investment portfolio well, even if one investment doesn't do well, some of the others very probably will - and in the end you still earn money.

Diversifying investments therefore protects investors from losses caused by one bad investment while also ensuring more stable growth of the portfolio.

The importance of diversifying an investment portfolio in points:

• Reducing the risk of loss: Diversification minimizes the impact of the poor performance of one investment on the whole portfolio.
• Protection against market volatility: A diversified portfolio that includes various asset classes (shares, bonds, real estate, etc.) helps to balance out the impact of fluctuations in their performance. For example, when shares fall, bond prices may rise.
• Optimizing returns: Spreading your investments allows you to take advantage of opportunities in various markets and across multiple sectors.
• Adapting to different investment goals: Every investor has different goals, a different time horizon and a different tolerance for risk. Thanks to diversification, you can adapt everything to suit yourself.

In what ways can we diversify?

1. Across asset classes: Invest in real estate, shares, bonds, commodities and so on - see below.
2. Across sectors: With shares, spread your investments across various sectors (e.g. technology, healthcare, energy).
3. Geographic diversification: Consider investments in both the domestic and foreign markets in order to take advantage of opportunities in different economies.
   TIP: Explore our investment properties abroad.
4. Time diversification: Regular investing can reduce the impact of short-term volatility.

Reading tip: Are you completely new to the world of investing? Read the basics of investing, or How to start investing.

What asset classes are there?

Each asset class has a unique set of risks and opportunities. The main asset classes include:

• Shares: Stakes or equity in publicly traded companies.
• Bonds: Fixed-income debt instruments issued by governments or companies.
• Real estate: Land, buildings, natural resources, agriculture, livestock and deposits of water or minerals.
• Exchange-traded funds (ETFs): Tradable baskets of securities that track an index, a commodity or a sector.
• Commodities: Basic raw materials needed for the production of other products or services.
• Cash and cash equivalents (CCE): Treasury bills, certificates of deposit (CDs), money markets and other short-term low-risk investments.

How much is generally recommended to invest in real estate?

• Conservative investors: Real estate can make up 30-50% of the portfolio, because it is a relatively stable and less volatile asset.
• Balanced portfolio: For balanced investors, the recommended share of real estate is 15-30%. Invest the remaining part in shares, bonds and other asset classes.
• Aggressive investors: Those who want to maximize growth can reduce the share of real estate to 5-15% in order to free up more funds for shares or other riskier investments.

If you don't have a large enough amount of capital to buy an investment apartment or an entire property, the best option appears to be micro-investments in real estate. And if you go for it through InvestBay, you not only gain your share of a property, but you also enjoy a regular income from rent and a profit from the sale.

How best to diversify a portfolio?

Diversification is the key to successful investing, and that holds true for micro-investments in real estate too. With the InvestBay platform, which provides access to real estate through crowd-owning, investors with limited capital can start building a stable and profitable portfolio. Below we present three specific scenarios for how to diversify using micro-investments in real estate.

Scenario 1: You are starting out and have less capital

Goal: To build a diversified portfolio with minimal risk.

• Small investments in multiple properties: InvestBay allows you to get involved with even low amounts. Because you can start investing with as little as CZK 2,500, you can, for example, spread your first CZK 10,000 across three different properties.
• Geographic diversification: Choose properties so that they are in different countries - one property in Croatia, another in Spain. This way you minimize the risk associated with developments in a single location.
• Long-term growth: This approach reduces risk and allows for the appreciation of capital through growth in the value of the properties.

Scenario 2: A balanced portfolio for an intermediate investor

Goal: To create a balanced portfolio that combines stability and growth potential. Ideal for an investor with a time horizon of 5-10 years who is willing to take on moderate risk but at the same time is looking for certainty in part of their portfolio.

Spread across various asset classes:

• Shares (50%): Investments in shares provide growth potential, but they are more volatile.
• Bonds (30%): They ensure the stability of the portfolio.
• Real estate (15%): Real estate brings stable growth and protection against inflation. You can choose investments in real estate funds, crowdowning through InvestBay, or combine the two.
• Cash and commodities (5%):
  • 3% cash: A reserve for unexpected opportunities or market fluctuations.
  • 2% commodities: For example gold as protection against inflation.

Reading tip: Crowdfunding vs. co-ownership of a property

Scenario 3: A dynamic portfolio for an aggressive investor

Goal: To maximize returns through growth assets, while part of the portfolio remains protected by investments in real estate with high yield potential. This scenario is ideal for an investor with a longer time horizon (10+ years) who is willing to take on higher risk in exchange for the possibility of significant gains.

Spread across various asset classes:

• Shares (65%): The dominant part of the portfolio is focused on growth assets.
• Real estate (20%): Diversification with real estate through InvestBay, where you diversify by geographic area. It helps stabilize part of the portfolio and brings a regular income from rent.
• Commodities (10%): For example:
  • 7% gold and silver: As protection against inflation and security in times of crisis.
  • 3% speculative commodities: For example lithium, which benefits from the growth of electromobility.
• Cash and short-term reserves (5%): A reserve for quickly taking advantage of investment opportunities or protection against a liquidity crisis.

The benefits of micro-investments with InvestBay

1. Low entry capital: Investments from as little as CZK 2,500 (with the option of repeated and higher investments).
2. Easy diversification: The ability to spread investments across various markets and types of property.
3. Travel to the destination: The option to use the properties you have invested in for your own holiday, and at a discount. Read more here: Travel.

Common mistakes in portfolio diversification and how to avoid them

Diversification is the key to successful investing, but doing it incorrectly can reduce the effectiveness of a portfolio and increase risk. What are the most common mistakes?

1. Over-diversification

Investors often try to invest in too many assets with the idea that more means better. This often leads to a portfolio that is difficult to manage and to a dilution of potential returns.

How to avoid it:

• Focus on quality, not quantity. Choose 10-20 well-diversified assets that cover various sectors and asset classes.

2. Insufficient diversification

Some investors focus only on a limited number of assets, for example only on shares from one sector or one geographic area. This can result in an increased risk of loss as well as a lack of flexibility.

How to avoid it:

• Invest in multiple asset classes, such as shares, bonds, real estate, commodities or cash.
• Spread your portfolio across various sectors (e.g. technology, healthcare, energy) and geographic areas.

Reading tip: How to buy a property abroad?

3. Excessive trust in popular sectors

Investors often direct their investments into currently popular sectors, such as technology or cryptocurrencies, without taking into account their volatility and risks.

How to avoid it:

• Set yourself limits on the maximum share of a single sector in your portfolio (e.g. 20%).
• By adding more stable assets, such as bonds or real estate, you will reduce volatility.

4. Irregular review of the portfolio

Many investors let their portfolio "run on autopilot" without regularly reassessing it. This can result in an imbalance in the portfolio and in failing to notice changes in the markets (or in personal goals).

How to avoid it:

• Carry out a regular review of your portfolio, at least once a year.
• Use a rebalancing strategy, in which you sell off parts of the assets that have grown significantly and invest in undervalued asset classes.

5. Underestimating the risks of individual assets

Some investors focus only on the returns of assets without taking into account their risks, such as volatility or market uncertainty.

How to avoid it:

• Assess the return-to-risk ratio (e.g. the Sharpe ratio).
• Choose assets with varying degrees of riskiness - combine volatile shares with less risky bonds or real estate funds.

A practical summary: How to diversify properly

1. Set your investment goals: Clarify your time horizon, your tolerance for risk and your return expectations.
2. Spread your investments: Combine shares, bonds, real estate, commodities and other asset classes.
3. Balance your portfolio: Monitor whether your spread is still in line with your goals, and carry out rebalancing.
4. Analyze the market regularly: Follow economic trends and adapt your investments according to the current situation.
5. Trust the facts, not your emotions: Base your investment decisions on data, not on fashionable trends or speculation.

A well-diversified portfolio is the key to long-term success. Avoid the mistakes mentioned above and secure stable returns with minimal risk.