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Only true diversification protects your portfolio in times of crisis

Reading time 5 Minuten

Diversification is not complicated, and yet many do it wrong. With expensive consequences in times of crisis.

The statistics don't lie: over the long term, equities perform better than other asset classes. In a long-term comparison of over 100 years, equities yielded about 3% more in real terms per year than bonds and even 6% more than gold. However, this is of little consolation to investors whose portfolios suffered major losses due to the Corona crisis.

Once again it has been shown that share prices do indeed fluctuate, and that losses in value occur suddenly and without warning, because many investors need liquidity at the same time, and suddenly throw their investments onto the market.

Up to this point, many investors are convinced that they have a well diversified portfolio. And then observe with horror that all their investments start to slide in an avalanche, as it were, instead of stabilizing each other. Diversification proves to be an optical illusion. In addition to equity investments, there are other risky investments such as high-yield corporate bonds with low credit ratings or illiquid investments such as private equity or hedge funds in the portfolio. In the market crash, however, it turns out that these investments are all subject to the same risk factors and therefore do not contribute sufficiently to diversification, i.e. portfolio stabilisation in times of stress.

It is undisputed: in today's low interest rate environment, it is a challenge to achieve a reasonably attractive return while at the same time arming oneself against drastic losses in value. The solution to the supposed dilemma lies in "real" portfolio diversification.

There are asset classes that actually complement each other: equities and high-quality government bonds. As return drivers, equities provide the necessary portfolio performance in good times. In bad times, when equities go down, government bonds are sought after as safe havens. Their prices subsequently rise and mitigate the loss of the equities in the portfolio.

A simple portfolio structure, consisting of liquid shares and high-quality bonds, is sufficient for a portfolio to be well diversified. One can do without unnecessarily expensive and non-transparent investment categories, such as hedge funds or high-yield corporate bonds, which do not offer any additional diversification added value, but instead actually increase losses during the crisis.

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