Use Tools to Diversify Portfolio! Like everything else today, the diversification of investments can be made easier with the help of electronic tools. This is helpful insofar as the theories of economists like Markowitz are often based on very concrete (but unfortunately also complicated) mathematical formulas. To apply these correctly and, above all, to check them again and again, is usually hardly possible for private investors.
So if you would like to review your decisions frequently or generally need a decision-making aid for the right diversification, tools can be a useful aid. Some tools can even automatically adjust the portfolio.
Here, however, the investor should never lose his sense of proportion – if you don’t know what you are doing, you should rather make a less frequent and more thorough manual adjustment to your investment.
The fact that large banks and investors only use computers to decide where to invest should not mislead private investors into letting their investments be managed in the same way, because big banks can deal with losses differently and compensate them with hedging transactions.
In addition, there are completely different fees for trading securities for private investors – too frequent adjustment can therefore significantly reduce the return.
Diversification and ETFs
So-called ETFs, or exchange-traded funds, have been very popular for some time. The investor does not invest in individual values of companies or the development of raw materials, but simply in the value development of a stock market index itself.
Everyone knows the daily “water level reports” in the stock market news about the current DAX score. At the end of the year, investors usually pat each other on the shoulder because the stock index has once again gained a significant percentage. The problem for individual investors is to find out which values will rise exactly because the stock market index only shows the average of the stock values determined.
This is where the principle of ETFs intervenes quite simply: You only invest in the development of the selected stock market index. If the DAX rises by five percentage in this example, the related ETF also rises by the same value. Compared to other funds that manage a certain equity portfolio in a representative way, the expensive administrative effort of the fund manager is eliminated.
As the considerations on correlation show, one should not only rely on one specific index with ETFs. Therefore, investors should always keep an eye on global diversification and inquire about different asset classes at the ETF.
For example, it might make sense to add a DAX ETF in the equity securities segment to your portfolio and at the same time, an ETF with Chinese commodities or US government bonds.
If you want to diversify, you can do this at all levels, only the scale changes depending on the investment method. The larger the scale, the easier the distribution. In this way, you can surely decide more quickly between the ETFs of different stock market indices than between many individual securities that you analyze yourself in painstaking detail.