Skip menuLog in to Nordea NetbankLog in to Nordea Business

How diversification can help you sleep better at night

The old saying “don’t put all your eggs in one basket” perfectly captures the main point of diversification. In investing, risk is at its highest when you have all your money in one investment. If that one share or investment performs badly, your entire portfolio is at risk.

Diversification aims to mitigate the risks involved in investing. If one of your investments underperforms, another may perform well and help offset the impact on your overall portfolio. As a rule, a diversified investment is less risky than an undiversified one.

Diversification is also an integral part of target-oriented and long-term saving, as the return and performance of a well-diversified portfolio are more predictable in the long term. Losses are often felt more strongly than gains, but by diversifying you can reduce high volatility in your portfolio and sleep better at night. While diversification cannot eliminate the risks involved in investing entirely, it can significantly reduce their impact on your overall portfolio.

How does it work in practice?

When you invest independently in equities and fixed-income instruments, you are responsible for diversifying your investments. A well-diversified portfolio includes different asset classes, typically both equities and fixed-income investments. By adjusting the balance between equities and fixed-income investments, you can most effectively influence both the expected return and the risk level of your portfolio.

For many investors, investing in funds is a more straightforward option than picking individual shares, as diversification is built in funds automatically. All you need to do is choose a risk level that suits you. When you invest in mutual funds, a professional also manages the balance between equities and fixed-income investments in line with your chosen risk profile.

How many stocks do you need?

The number of stocks you hold really does matter when building a portfolio. The good news is that you’ll start to see the benefits of diversification as soon as you add a second company to your portfolio alongside the first. However, if you want broad diversification that closely tracks general market performance, you would need to buy shares in hundreds of companies across different sectors. The right number depends on how much you invest, which companies you choose and how much risk you are comfortable taking.

One option is to build the core of your portfolio around a broadly diversified fund and complement it with a smaller selection of individual stocks. This way, you can enjoy both the greater stability that diversification offers and the excitement and appeal of investing in shares. In other words, you get the best of both worlds.

Diversification also applies to company size and stage of development. Fast-growing companies often involve higher risk and sharper price swings, while more established companies tend to offer steadier performance. When your portfolio includes different types of companies and multiple asset classes, a weak period for a single investment will not usually determine the overall performance of your portfolio.

Three more cornerstones of diversification

Diversifying across shares and asset classes is a good starting point but you can also look at your investments from a broader perspective. The following three cornerstones will help you build an even more resilient investment portfolio – one that is better equipped to withstand market turbulence.

1. Diversification across regions

Markets in different countries and regions do not develop at the same pace. Economic cycles, interest rates, currencies and political conditions vary from one region to another. While one region may be thriving, another may be struggling with uncertainty. 

A good example of this is the period that followed the global financial crisis, when North American markets delivered significantly stronger returns than Europe. If you had invested only in Europe, you would have largely missed out on that growth.

By investing across multiple regions, you are not dependent on the economic situation of any single area. Geographical diversification helps to spread risk and supports steadier portfolio development over the long term, even if individual regions experience sharp fluctuations from time to time.

2. Diversification across sectors

Different sectors perform well at different times. When interest rates rise, industries that rely heavily on borrowing may come under pressure. At the same time, banks and financial institutions may see their earnings improve as interest income increases.

When economic growth slows, consumers tend to tighten their belts. Travel, fashion and consumer durables are often among the first sectors to suffer. By contrast, everyday essentials such as food and health care tend to hold up better, as they are needed regardless of economic conditions.

If your portfolio consists of companies from just one sector, you are fully exposed to that sector’s ups and downs. When your portfolio includes several different sectors, a weak period in one is less likely to determine the overall outcome. This means that diversification across sectors makes investing more stable in all economic environments.

3. Diversification over time

Diversification over time means investing your money at different points in time, rather than all at once. For many people, monthly saving is an easy way to put this into practice. When you invest regularly, you buy investments at different price levels and in different market conditions.

Imagine investing the entire amount just before a market downturn – that could be painful. Time diversification helps reduce this risk, as some investments are made at higher prices and others at lower ones. This limits the impact of any single poorly timed investment decision.

Time diversification also supports a long-term approach. Regular investing helps you stick to your plan even when markets are volatile and the news flow is unsettling. It doesn’t eliminate market risk but it makes investing easier to manage in everyday life.

Hits and misses – the reality of investing

Now that you’ve learned the basics of diversification, it’s time to talk about the human side of investing. Theory is one thing, but in practice investing involves emotions, mistakes and learning experiences.

The first investment decisions make almost everyone feel nervous, even when the sums are small and the risks limited. That’s perfectly normal. Beginners often end up choosing shares for their portfolio because the company name is familiar, the idea feels right or the investment simply “sounded sensible” at the time. That, too, is part of the journey.

It’s easy to focus on share price movements, even if you don’t yet fully understand the businesses behind the companies whose shares you own. Emotions influence investment decisions more than we’d like to admit, and investors may buy or sell investments based on how they feel on a particular day.

A falling share price can easily tempt you to buy more but if you don’t fully understand the reasons behind it, you could eventually see your losses growing in step with the size of your holding – especially when investing in individual companies. Sometimes success is simply down to luck, yet in hindsight it may be interpreted as skill.

Important information about investing

This is an advertisement. The information provided on this website is intended as general product information only and does not constitute investment advice or recommendations. Past performance is not a guarantee of future results. The value of investment products may increase or decrease due to market movements, and it is not certain that you will get back the entire amount you invested. Before making any investment decisions, you should read the relevant prospectus and key investor information documents for more details about the investment product.

Need help?

Personal customers