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What are Asset Classes? Diversification: the key to a successful investment strategy.

Aktualisiert: 24. Aug. 2023



You've probably heard that it's important not to invest your money in just one place. But why is that actually the case? The answer lies in spreading risk, also known as diversification. As noted financial expert Burton Malkiel said, "Diversification is the only free lunch in investing."


In today's article, we will look at what asset classes are and why it makes sense to have a combination of these classes in your portfolio. Specifically, we will look at stocks, bonds and alternative investments.


Shares:

Shares are interests in a company. When you buy a share, you become a partner in the company and have the right to a share of the profits. Shares can usually generate high returns, but there is also a risk that the company may go bankrupt or not perform as well as expected.


Bonds:

Bonds are debt instruments issued by governments or companies. You lend the issuer the money and receive a fixed interest rate in return. Unlike stocks, bonds usually have lower risk, but also lower returns.


Alternative investments:

Alternative investments are those investments that cannot be assigned to traditional asset classes such as equities or bonds. They include, for example, private equity, hedge funds, commodities, real estate or gold. In some cases, alternative investments offer a higher return, but also a higher risk than traditional investments. In the overall portfolio context, however, they can contribute to broader diversification.


Why is diversification important?

By investing your money in different asset classes, you minimize the risk that your portfolio will be severely impacted due to poor performance of a single asset class. You can therefore ensure a certain stability and security even in bad times. It is important to note that diversification does not mean that you take no risk. However, it does mean that you spread the risk in different ways, rather than concentrating it in just one asset class.


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