When the market is full of uncertainty, it is not uncommon to suggest your portfolio about ‘diversity’ and ‘long -term’. Now, we discuss what it takes to diversify it.
Sustainable
To diversify your portfolio, you should see how you want to make a new investment, it is statistically related that you already have in your portfolio. Suppose you wear units in a large-cap active fund for the NSE 100 index. Also, suppose you want to invest in mid-cap active funds. You hope to see how the returns of mid-cap funds have merged for the returns of large-cap funds in the past. For this you need to do the previous return and statistically testing how the money is treated over time. This occurs when you bring diversity within a asset class. When you bring diversity in asset classes, you should do the same practice, say, equity and bond returns. Is there anything that we can continuously do as individual investors? And this is also not a major issue.
Empirical evidence suggests that correlations are unstable over time and in market conditions. That is, two asset classes may have a weak correlation with each other when the market is growing, but there is a strong relationship when the market crash. You should consider these changing relationships to create a meaningful diverse portfolio. Therefore, the next time you are asked to diversify your portfolio, you should ask the person how to do it. Often, the term ‘diversification’ is thrown into a conversation that involves the management of risk. If you want to manage the risk by implementing an ideological accurate diversification process, then you should do a lot of analysis.
conclusion
Often, when one refers to diversification, they often spread savings in many investments. But the statistical relationship between diversification investments is more about the number of investments you made. If all funds invest in the same set of securities, then what does it mean to keep 10 different mutual funds? It is best to ask questions on such suggestions. To give ‘diversity’ to investments and suggest that you invest for ‘long -term’, unless you are given a practical procedure to implement such suggestions to achieve life goals within the desired time horizon. There is really a lot of difference between talking about an investment concept and applying it in behavior.
(The author provides training programs to individuals to manage their personal investment)
Published – May 12, 2025 06:56 AM IST