By spreading your investments, you also spread your risks. When prices of different investments rise or fall for different reasons, you limit the expected ups and downs of your portfolio. The price movements of the different parts can then balance each other. You get the best risk reduction when you combine investments that react in opposite ways to certain events.
What is good diversification?
The two most important types of investments are shares (usually higher risk) and bonds (usually lower risk). Simply said, shares normally give the highest return when the economy grows, and bonds usually perform better when economic growth slows and interest rates fall. Some investors also switch from shares to bonds when they want to take less risk for a while, for example during a crisis. A well‑diversified investment portfolio contains both investment types. Adding commodities or alternative investments can also help with diversification.
Shares (including real estate shares) and bonds are the main investment types to spread across. Their prices react differently to developments in the market. Because shares are normally riskier than bonds, the balance between these two types mainly determines the total risk of your investment portfolio.
Risk Indicator Investing: the diversification of five standard profiles
ING and other members of the Dutch Banking Association have described five investment profiles. These make it easier to compare different investment services. For these profiles, the balance between ‘growth assets’ (such as shares, real estate and alternative investments) and ‘fixed‑income assets’ (bonds) is explained.
Another important point when putting together a good investment portfolio is whether you invest all your money at one moment or not. Prices go up and down. If you invest all your money when prices are high, it may take a long time before you reach a good average return. It can even take years before your portfolio returns to the starting value. Unfortunately, nobody knows the best moment to step in. That is why you can also choose to spread the risk of an unfavourable purchase price.
Investing in parts
Imagine you have enough money on 02/01 to buy 1,200 shares of share X. You can decide not to invest all your money at once, but to buy smaller amounts over a period of time. This way, you average out your purchase price and balance the price highs and lows. You spread your purchases over a longer period.
Example: 12 monthly purchases
In this example, you buy 100 shares of X on the first trading day of every month. This means you invest your money over one year. The average price for your 1,200 shares can then be lower compared to buying all 1,200 shares on 02/01. Below you see three scenarios: a falling price, a fluctuating price and a rising price during the year.
| Date | Decreasing | Fluctuating | Increasing |
|---|---|---|---|
| 2 January | €25,25 | €25,25 | €25,25 |
| 1 February | €24,00 | €20,01 | €26,00; |
1 March | €24,23 | €26,20 | €27,00 |
| 1 April | €24,13 | €27,33 | €27,50 |
| 1 May | €22,00 | €30,10 | €28,00 |
| 1 June | €22,76 | €17,23 | €27,00 |
| 1 July | €23,33 | €18,00 | €28,00 |
| 1 August | €21,15 | €22,22 | €31,00 |
| 1 September | €20,50 | €22,00 | €33,00 |
| 1 October | €20,01 | €23,16 | €32,00 |
| 1 November | €20,15 | €24,99 | €35,00 |
| 1 December | €19,86 | €24,00 | €31,00 |
| Average | €22,28 | €23,37 | €29,23 |
| Total Investment | |||
| 1. Invest everything in one go | €30.300 | €30.300 | €30.300 |
| 2. Invest in parts | €26.737 | €28.049 | €35.075 |
| Cheaper because of investing in parts: | €3.563 | €2.251 | - €4.775 |
Conclusion from this example: more favourable with fluctuating prices
If you buy 1,200 shares on 02/01, you pay €30,300 (1,200 × €25.25). You can see that in the falling and fluctuating scenarios, spreading your investments is cheaper. In the rising scenario (scenario 3), spreading is not cheaper. It is up to you to decide what works best for you. But spreading your investments seems most attractive when you expect a more unpredictable price pattern.
It is useful to check the balance between shares and bonds in your portfolio from time to time. The balance can change due to price movements. This means your investment risk may become different from the risk level (investment profile) you chose. Your personal situation may also change, meaning you may want or be able to take more or less risk.
"}},{"componentType":"paragraph","title":"Good to know","richBody":{"value":"Investing involves risks and costs. You may lose (part of) your investment. Read more about the risks of investing and how you can reduce them.
*This translation is intended for the customer’s convenience only. In the event of any inconsistency between the English translation and the original Dutch version, the original Dutch version shall prevail.
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