In this class of assets – cryptocurrencies, ICOs, investments in venture capital, startups, ideas and other investment instruments with a high level of risk.
We do not recommend sending more than 5-7% of your investment portfolio there in order to minimize the risk of losing income or a body of capital.
3. Follow Buffett’s Rule
Warren Buffett’s first rule is never lose money
second rule – never forget the first rule.
How to apply this principle in practice?
Let’s say you have a portfolio of 10 million rubles.
The percentage of funds that go to the investment foundation (lower asset class) and the investment base (second asset class) must be equal to your age.
If you are 50, invest 50% of your capital in the lower two asset classes to reduce risk and preserve capital.
4. Diversify smartly
There is a proven mathematical model that helps to determine in how many banks (at the same rate of 8%) money should be decomposed so that if one of them defaults, your worst-case scenario would be a year without profitability, but not loss of the body of capital and not losses.
The formula looks like this: 100% / 8 = 12.5
Round to 13 and add 1
We get 14.
If you have 1 million rubles, you need to split it into 14 banks at 60-70 thousand rubles. Then, if one of them defaults, the profitability from the other banks will cover losses during the year, and the body of capital will not decrease.
Let’s apply this formula to investing in small and medium businesses with an average rate of 25%.
100/25 + 1 = 5
We recommend our investors to allocate capital in 4-5 companies. This significantly reduces the risks in the event of default or interruptions in profitability in one particular company. The rest will cover the losses and the body of capital will be preserved.
Composing an investment portfolio, you can significantly reduce the risk of losing money if you approach diversification correctly.
To do this, you need to follow 4 steps:
- Don’t diversify unnecessarily
- Lay out the portfolio in accordance with the “investment triangle” rule
- Follow Buffett’s Rule
- Diversify wisely
We hope the material was useful to you. If you have any questions or still have questions, we will be happy to discuss them in the comments!
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Prepared by Kristina Bulankina, editor Seryakov | Investments.