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Diversification of portfolio capital

The whole point of this tool can be included in a popular saying: "Never insert all the eggs in one basket." Please note that between risk and expected rate of return, there is proportional relationship. The greater the risk, the higher the expected rate of return. The most common investment portfolio is divided into a high-risk (which might bring big profits, but also burdened with a greater probability of losses), and part of a safe (very small risk, but also the relatively small profits) and a certain amount of cash, waiting for the appearance of favorable investments.

The term "diversification of investment," first appeared about 60 years ago, in the published by Harry Markowitz's work on portfolio theory. The main argument put by the author introduced a new element into the decision-making process security. Markowitz told to look for investments that will not only bring profits, but also to minimize the risk. When it comes to a portfolio composed solely of action, the principle of diversification introduced another Nobel laureate William Sharpe.

According to the guidelines of the American economist, a key role in risk reduction plays a selection of companies of varying correlation coefficient returns. Thus the effect of increasing the number of companies (their share in the portfolio should be equal) would reduce the risk of the whole portfolio, because it will depend less and less of the risk of individual securities. But we should not draw hasty conclusion that the more different stocks in the portfolio, the better. In this case, may be called. "Overdiversification" or simply przedywersyfikowania portfolio. It is very difficult to observe to date on what is happening in eg. 70 listed on the Stock Exchange companies. Second, the choice of companies to our portfolio we will took much more time and transaction costs can increase significantly if we are forced to buy small stakes.

How many companies have the best portfolio?

The correct structure of the portfolio is in fact crucial thing on the way to a profitable investment. They should determine the size of the various proportions, depending on our individual preferences, investment objective, risk acceptance, and the age in which we currently find ourselves. Also note that the greater the number of companies in the portfolio requires more time that we spend on management.

Personally I prefer the principle that an investor should have 20 shares of various companies in the investment portfolio, but no more than 3 company in the industry. Such a division of the portfolio can effectively reduce the investment risk, while maintaining the chances of achieving above-average profits. Of course, if after a while you will find that some of these companies definitely excels above the rest, I consider shortening positions in companies vulnerable to the stronger. This effect is called "concentration of investment".