When someone starts investing, one of the first recommendations they usually hear is: diversify.
The problem is that diversifying does not simply mean having many investments. A portfolio with several products can still be highly concentrated if they all depend on the same sectors, countries or economic factors.
A well-planned diversification strategy seeks something simpler: to reduce dependence on a single investment, market or source of risk. For those getting started, this does not require building a complex portfolio. In fact, a simple structure can be better diversified than one with many redundant positions.
1. Combine different sources of risk
The first level of diversification consists of preventing all wealth from depending on a single type of asset.
Liquidity fulfils an availability function and makes it possible to deal with unexpected needs without having to sell other investments at a bad time. Fixed income can provide a different return and risk profile from equities. The latter offer long-term growth potential, but can also suffer significant declines.
Real estate can add another source of return and risk, although its behaviour depends greatly on how the sector is accessed: buying a home directly is not the same as investing through a SOCIMI, a fund or a participatory financing project.
The key is not to allocate capital in equal parts, but to build a coherent combination based on the objective, the horizon and the ability to withstand losses.
In addition, combining several assets does not guarantee that some will rise when others fall. In periods of stress, different markets can fall at the same time. The advantage of diversifying is reducing dependence on all of them responding to the same factor.
2. Start with a broad and simple base
For a beginner, building a portfolio by individually selecting many stocks, bonds or other assets can require too much time, capital and analysis.
One alternative is to use funds or ETFs that provide broad exposure to markets, sectors or geographies.
For example, a global fund or an ETF that tracks a broad index can spread the investment across hundreds or thousands of companies. This reduces the impact that poor performance by a specific company would have.
But having many positions does not guarantee real diversification.
An ETF can include hundreds of companies and still be highly concentrated in:
- a single country;
- one sector;
- large companies;
- one currency;
- or a specific investment style.
That is why, rather than counting how many assets a product contains, it is worth analysing which risks it depends on.
If you want to explore this type of vehicle in more detail, you can consult our guide on how to start investing in ETFs and combine them with real estate.
3. Diversify within each block as well
Diversification does not end with distributing wealth among different asset classes.
Within equities, exposure can be built across:
- different sectors;
- geographies;
- company sizes;
- and markets.
In fixed income, the following can vary:
- issuer;
- maturity;
- credit quality;
- interest rate type.
And within real estate, diversification can be achieved by:
- developer;
- location;
- asset type;
- strategy;
- term;
- or investment structure.
This is especially important because several different investments can share much of the same risk.
For example, holding one S&P 500 fund, another Nasdaq 100 fund and a third one specialised in US technology may seem diversified, but there is likely to be significant overlap among their main companies.
The same applies to real estate: four residential projects in the same city and at a similar stage of development do not eliminate much of the local or market risk.
On platforms such as Urbanitae, reduced entry amounts can make it easier to spread capital across several projects. But that diversification only exists if the investor effectively distributes their investment among operations with different characteristics.
4. Also add geography, time and liquidity
Two assets can be different and still depend on the same country or economic cycle.
That is why diversification can also incorporate exposure to different geographies, provided it makes sense within the strategy.
Time is another dimension.
For those who invest new savings periodically, following a consistent investment plan makes it possible to spread entries over time instead of depending on a single purchase moment. This does not guarantee a higher return, but it reduces dependence on getting one single entry point right.
It can also be useful to stagger maturities or terms.
A portfolio made up only of illiquid investments that mature several years from now may be diversified by assets, but may be unsuitable if the investor needs access to the money earlier.
That is why good diversification also takes into account when each part of the wealth will be available.
5. Look at your overall wealth, not just your investment account
One of the easiest mistakes to make is analysing diversification only within a financial portfolio.
Real wealth can also include:
- main residence;
- additional properties;
- own business;
- pension plans;
- cash;
- and even the main source of income.
For example, a person who works in the technology sector and also concentrates a large part of their portfolio in technology companies has greater economic exposure than their investment account alone shows.
Similarly, someone who already holds a large part of their wealth in housing may increase their real estate concentration if they add high exposure to the same sector.
That is why, before adding a new asset, it is worth asking:
Does it really add a different risk, or does it simply increase an exposure I already have?
How to detect false diversification
A portfolio can seem diversified and not actually be so.
Some signs include:
- several funds that contain practically the same companies;
- different ETFs concentrated in the same market;
- numerous real estate projects in a single location;
- different assets that depend on the same economic cycle;
- or products with very similar terms and liquidity.
There can also be the opposite problem: overdiversification.
Continuously adding products can create duplication, increase costs and make the portfolio harder to understand without significantly reducing risk.
A portfolio does not improve simply because it contains more positions.
If you are starting with little capital, you can explore this idea further in our guide on how to diversify an investment portfolio with little capital.
Reviewing and rebalancing over time
Diversification is not static either.
If one part of the portfolio rises much more than the rest, it may end up representing a greater weight than expected. Periodically reviewing the distribution makes it possible to check whether it remains consistent with the initial objective.
In liquid assets, rebalancing can be carried out by buying or selling positions.
In illiquid investments, such as certain private real estate projects, it is usually more practical to use new contributions, repayments or maturities to reinforce the parts of the portfolio that have become underweighted.
There is no need to review the portfolio constantly. The objective is to maintain a coherent structure, not to react to every market movement.
If you want to go deeper into this process, you can consult how to build an investment strategy step by step.
Diversifying means reducing dependencies, not eliminating risk
Diversification does not make risk disappear, nor does it guarantee that a portfolio will not lose value.
Its function is more specific: to prevent the result from depending excessively on a single company, market, sector, project or decision.
For those getting started, this usually requires less sophistication than it seems. A broad base, genuinely different exposures, controlled costs and periodic review can provide a more solid structure than accumulating many products without understanding how they relate to one another.
Diversifying well is not about having more investments. It is about making sure they do not all depend on the same thing.
