Investment trusts are one of the tools that make diversified investment easy, and have an inseparable relationship with diversified investment. If you understand the merits of diversified investment, it will help you to choose an investment trust, so this is something that you should understand when you start investing.
What is diversified investment?
Diversified investment is not limited to one investment destination, but invests in multiple investment destinations. And the famous quote “Don’t put eggs in one basket” is often introduced as an explanation.
This is because “If you put eggs in one basket, they may all break when you drop the basket, but if you divide them into multiple baskets and put them in one basket, even if you drop one of them, the other the eggs in the basket are safe. “
“If you concentrate on one asset (stock), the price drop of that asset will directly lead to the price drop of the entire investment asset, but if you make a diversified investment in multiple assets, one of them will be Even if the price drops, it can be covered by the price movements of other assets, and it can be expected to mitigate the decline in the price of investment assets as a whole. “
However, this alone is not enough to explain the essence of diversification. The essence can be understood by delving into the following three benefits of diversified investment.
- Reduce the probability that the value of all investment assets will be zero
- Improve the operational efficiency of all investment assets
- You can improve the reproducibility of investment ideas
Let’s look at each one.
Reduce the probability that the value of all investment assets will be zero
I think this merit is relatively easy to understand.
A typical example of a case where the asset value becomes zero is the bankruptcy of a country or a company. In the long run, there are many cases in which even countries and companies with sound finances go bankrupt.
If you invest in a single asset and the value of that asset becomes zero, the value of the entire investment asset will also be zero. However, if you make a diversified investment in multiple assets, the value of the entire investment asset will not be zero unless the value of all the assets is zero.
Once the value is zero, it cannot be regained, so it is a great advantage that diversification is an effective way to avoid it.
Improve the operational efficiency of all investment assets
Operational efficiency refers to “how stable and high profits can be obtained”, and it is said that the higher the return is for the same risk, and the lower the risk is for the same return.
The reason why it is possible to improve operational efficiency by making diversified investments is because each asset has different price movements.
Let’s take an asset that is easy to understand and has the same return as an example. For example, suppose you have asset A and asset B that have the following price movements.
The above is an example and may differ from the actual price movement.
In the period shown above, the returns of asset A and asset B are finally the same, but the risk is lower for asset A, so it can be said that asset A is “more efficient”. Therefore, if you can only invest in either Asset A or Asset B, then Asset A is the correct answer if you want to focus on investment efficiency.
But if you are free to invest in either, the answer will change. If “diversified investment in asset A and asset B” is also included in the options, both assets are moving in opposite directions, so it is possible to greatly reduce the risk by making diversified investment with appropriate allocation., Operational efficiency is dramatically improved.
You can improve the reproducibility of investment ideas
Analysis of investment assets is very important for investing.
However, it takes a lot of effort to analyze one asset, and it is not realistic to analyze all the assets. In that case, the question of “what asset should be analyzed” arises.
In such a case, “investment ideas” are useful as clues to solve problems.
For example, suppose you come up with the investment idea that “it might be profitable to invest in the stock of the company that handles the product” from the experience
And with this investment idea, you will inevitably be able to try the following analysis.
- How much of the sales of the product account for the sales of the company?
- What is the composition of the purchasers of the product and is there room for an increase in the future?
- What is the manufacturing capacity of the product and is it possible to mass-produce it?
By conducting the above analysis, you can support your investment ideas and incorporate them into individual stock investments.
So, what about the following investment ideas?
- Invest in stocks of companies whose sales have been growing significantly recently
- Invest in stocks of emerging market companies with rapid population growth and economic growth
- Invest in bonds of companies with high yields and high capital adequacy ratios
The above are also good investment ideas, but even if we analyze them to support them, we cannot put them into individual stocks.
Of course, it is possible to repeat further analysis from here and drop down to individual stocks, but then there may be cases where the stock falls even though this investment idea is correct.