Diversification, which involves spreading capital across various investments, allows for minimizing the risk of losses and increasing the chances of substantial profits. In 2020, attractive returns can be achieved through small and mid-cap stocks from the WSE, ETFs, gold, cryptocurrencies, and corporate bonds.
One of the fundamental principles of financial management, which also applies to investing, is not to put all your eggs in one basket. In practice, this means spreading capital across various assets and financial instruments. Why?
Diversification in theory
This approach minimizes the negative impact of potential declines in a single investment on the entire portfolio. For example, in 2019, the largest companies listed on the Warsaw Stock Exchange yielded a negative return of -5.5%, but the gold price in PLN increased by 19%, and rental properties could generate an average of 6-8%. If we had invested all our money in the WSE in this example, we would have ended up behind.
Of course, this also works the other way around. Diversification allows for higher profits than sticking to a single solution.
Today, gold, real estate, or stocks of small and medium-sized companies yield higher returns than bank deposits. The catch is that they are significantly more risky, so at least half of the portfolio should be invested in safe instruments. Besides bank deposits, these include government bonds of stable countries.
Capital can be diversified in many ways. It can even be done within a single financial instrument, e.g., by buying shares not only in Poland but also on foreign markets. You can choose securities from companies across different industries and sectors of the economy. The same applies to, for example, investment funds or currencies.
Diversification in practice
How to diversify an investment portfolio in 2020? It’s worth focusing on emerging markets. Why? Assets on developed markets (Western Europe, the USA, Japan, Canada) are very expensive, reducing the chances of significant gains. The potential for further growth is limited in their case.
An emerging market is, among others, Poland. Compared to the stock markets of developed countries, shares on GPW are very cheap. According to the P/E ratio (which indicates how much you need to pay for one zloty of company profit), they are among the cheapest in Europe after Russia, Turkey, and the Czech Republic. Currently, the most attractive investment on the Warsaw market is shares in small and medium-sized companies (the so-called “mice”), i.e., those included in the sWIG80 index.
Investing in the stock market requires time and knowledge. A simpler and equally profitable option might be ETFs. These are shares in funds listed on the stock exchange. The global market for these instruments is growing year by year. Why? They are cheaper to manage (done by computers) and more efficient than traditional investment funds. Their characteristic is that they mimic specific indices rather than trying to beat them. The latter is achieved by a few managers who go against the market trends.
Due to the emergence of the coronavirus and the escalation of tensions between the USA and Iran, in the short term, gold might be a potentially good choice. The price of the yellow metal always rises when something bad happens (wars, crises, disasters). Gold prices in zloty have just hit a historic record. The price is also rising in dollars. However, physical gold (bars, coins) is more suitable for protecting wealth against inflation than for quick gains. For speculation, one can trade paper gold, i.e., contracts for the delivery of the commodity, and cryptocurrencies (especially Bitcoin).
It’s also worth paying attention to high yield debt. These are high-yield corporate bonds. Recently, this market in Poland has been rebounding after the GetBack scandal. Globally, you can invest in this way, for example, through investment funds. The same applies to bulk bonds from developing countries.
