In general, experts distinguish between four types of diversification. Each is based on a different foundation:

    Diversification in terms of asset classes
    Diversification in terms of investment regions
    Diversification with regard to investment sectors
    Diversification with regard to the investment period
     

Diversification in terms of asset classes

The aim here is not to invest the entire investment sum in a single asset class. For example, shares may be particularly promising. However, there have been numerous crashes in history in which shareholders have lost a lot of money because the stock market collapsed across the board.

Investors who had invested only parts of their money in shares, but the rest in, for example, bonds, time deposits and real estate, were better able to cope with such a slump.

Diversification in terms of investment regions

The second form of diversification is similar. Make sure that your money is not overly concentrated in one region. If, for example, you only have shares in US companies, investment funds with a focus on the USA and bonds from US companies in your portfolio, you should not be surprised that you suffer high losses when the US economy weakens.

If, on the other hand, he had also invested money in Europe and Asia with CFds in exnessbroker.net, he could probably offset the losses with gains in other areas. Even more risky is a concentration on smaller and less developed countries and regions, whose economic development is often characterised by high volatility. 

Diversification in terms of investment sectors

The third point can best be illustrated with an example. At the beginning of the millennium, the solar industry was considered a boom sector.

However, anyone who bought shares, bonds and investment funds from this sector unilaterally in the belief that this was the case, and still holds them today, is probably now sitting on high losses because he did not sufficiently diversify his money and also invested in other sectors.

Diversification with regard to the investment period

The last form of diversification primarily refers to investments with a fixed term - such as time deposits. Here investors should make sure that their investments do not all mature at the same time. This can make reinvestment more difficult - for example in times of low interest rates - and put a strain on liquidity.

Exemplary distribution of risk through diversification:

    European government bonds
    European corporate bonds
    Global equity markets
    Commodities
    Foreign exchange

A portfolio containing investments in the above example stocks would be a diversified investment containing both safe and potentially very profitable components.

Government bonds, for example, are generally considered very safe, but yield comparatively little and have become less important in the wake of some countries' debt crises.

However, the sovereign debt crisis has given a boost to corporate bonds, which also promise investors a better return with somewhat higher risk and at the same time serve to raise capital for companies.

Broad diversification through investments in the values of global equity markets decouples risk from individual markets and offers opportunities for returns in other areas.

Last but not least, commodities are always a good barometer for the economy. Gold and oil in particular have been sought-after speculative objects in the past, but carry a comparatively high risk due to their high dependence on economic and political developments. However, their short-term return often eclipses everything else.

The investor who diversifies according to this pattern hedges against many risks and at the same time profits in many conceivable scenarios. The important thing is that the gains and losses not only balance each other out, but ideally the losses are compensated for by diversification and a return is still left over. 

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