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A diversified portfolio is the opposite of concentrating your assets in one place. Instead of putting all your eggs in one basket, you deliberately spread your available assets across several smaller investments. Diversification is not just done for the sake of it. It lowers the risk of huge losses. Some positions may fall in value, but this can be compensated by gains in other portfolio components.

For diversification to work, it’s important to ensure that you include as many different types of investments in your portfolio as possible. There should be no relation between how they perform, in other words there should be no correlation. This is because equities, bonds and alternative investments, which include real estate, commodities and hedge funds, react differently to influences like economic growth, interest rate changes, inflation and crises.

Diversified portfolios can take many different forms. This is because personal factors play a role in decisions regarding the type and proportion of the various investments in your portfolio. These factors include your risk profile and your personal investment strategy.

Your investment strategy is determined by answering fundamental questions. What goal do you want to achieve by investing? Given your financial circumstances, how much money do you have available to invest regularly? What specific needs do you have? How much risk are you willing and able to take? The investment products you choose also depend on your investment horizon.

The longer you can invest your money, the less you need to worry about short-term market fluctuations. This gives you a bigger choice of investments. However, if you only want to invest your assets for a few years, you should limit yourself to low-risk – or defensive – investments. In general, low risk also means lower return prospects.

You can choose from a range of investment options depending on your risk profile and investment horizon. Look for investments that are aligned with your investment strategy. The options range from defensive through to high-risk investments, from national to international and from traditional to alternative ones.

Certain types of investments will be more familiar to you than others. However, when selecting the type and weighting of investments, always remember the first rule of a diversified portfolio: it’s all about the mix.

One common mistake that investors tend to make is to invest their assets primarily in their home country. This investor behavior is due to psychological factors and is contrary to the principle of diversification. Domestic investments generate lower returns and are not as low risk as many people think.

If you decide to diversify your portfolio, you should also buy securities from a range of regions and countries. Economic developments in different countries are not synchronized. You can diversify internationally through investments in the usual investment classes and in addition take selected positions in foreign currencies.

You should also diversify your investments across different sectors. This makes your portfolio less susceptible to trends and crises in any individual sector. Put simply, if you hold stock in both a sun-cream company and an umbrella manufacturer, you won’t have to worry about the weather.

Are high-risk investments part of your investment strategy? In this case especially, it’s advisable to include defensive investments, such as bonds and real estate, in your portfolio to balance the risk. These investments tend to develop differently to equities for example. When there is turbulence on the stock markets, the returns from your defensive investments can help to limit the losses from more volatile securities.

And, of course, defensive investors also need to diversify: They should put their money in equities too and not just in bonds.

Don’t underestimate your short-term financing needs. For this reason, every portfolio should include a certain proportion of cash holdings. This allows you to act in the event of unexpected investment opportunities. It also means you won’t have to sell investments at an inopportune time because you need cash. However, wealthy individuals in Switzerland tend to hold more liquidity than necessary, thereby missing out on return opportunities.

Investing in a range of countries, sectors and investment classes on your own as an investor can be comparably time consuming. Alternatively, you can buy units in actively managed investment funds or cost-effective index funds and exchange-traded funds (ETFs). All types of funds provide diversification because they contain several individual securities, which reduces the impact of individual securities on the fund’s risk and return. They also make it possible to spread risk appropriately within a single investment class, such as equities. Funds provide a means for private individuals to diversify their investments even if they don’t have much to invest. There is a broad range of funds available to suit practically every investment strategy.

The positions in your portfolio develop in different ways. After a while, one of your holdings may have doubled in value whereas another may have fallen significantly. This results in an imbalance that needs to be avoided in a diversified portfolio. It’s therefore advisable to analyze your portfolio on a regular basis. Does the weighting of the individual positions still correspond to your investment strategy? Or would it be better to realize the gains, build up other positions or buy new positions? By rebalancing your portfolio, you can maintain the proportions of the various investment classes at the levels you originally set.