• What is diversification and why is it important for investors?
• How is diversification implemented in practice?
• How can the benefits of diversification be measured?
• How do different types of investors benefit from a diversified portfolio?
• Why diversification is not just a concept of risk.
   

Diversification, often also referred to as risk spreading, means investing in a variety of securities and asset classes. This diversification allows fluctuations in individual markets to be cushioned by opposing developments in other areas. This basic rule of correlation, that different assets are not perfectly synchronized, forms the basis for minimizing risk. The portfolio theory of Harry Markowitz (1952) provides the scientific basis: According to this theory, the overall portfolio risk can be minimized through an optimal mix of investments without significantly impairing the expected return. In practice, this means that a broadly diversified portfolio experiences fewer extreme downturns and has a more balanced risk/return profile overall. Studies even show that globally diversified multi-asset portfolios deliver better risk-adjusted results over longer periods of time than narrowly focused investments.

A diversification strategy is implemented through systematic asset allocation. This involves spreading investments across different asset classes - for example equities, bonds, commodities or real estate - in order to optimize the risk/return ratio. A well-thought-out allocation ensures that gains in one class can offset losses in another. Benchmark independence is particularly important for actively managed portfolios: managers who are not rigidly tied to an index have greater freedom to invest in different sectors and regions. They can also use niche markets or alternative strategies (volatility, long-short equity, commodities ...), which further increases diversification.

Diversification can also be measured using key figures. The Sharpe ratio is a key measure of the risk-adjusted return: It shows the excess return of a portfolio per unit of risk. Funds with a higher Sharpe ratio have achieved more excess return per unit of risk taken. Volatility measures the fluctuation range of returns — specifically as a standard deviation over a period of time. It is a basic measure of the risk of a capital investment: The greater the volatility, the more prices can fluctuate. Broad, targeted diversification generally reduces portfolio volatility because extreme movements balance each other out. Similarly, risk diversification typically also reduces the maximum drawdown. This key figure indicates the sharpest cumulative fall in a portfolio within a certain period of time. If you combine lower volatility with a lower drawdown and keep an eye on the return, the Sharpe ratio of the overall portfolio usually increases. Overall, the effectiveness of diversification is therefore reflected in higher risk-adjusted returns. 

Diversification makes sense for all investors. Long-term investors benefit because a broadly diversified portfolio mitigates the effects of individual market lows and thus allows capital to grow evenly. In this way, long-term goals remain predictable, even if individual markets weaken in the meantime. A diversified portfolio acts as a buffer against undesirable developments in individual investment areas - from individual shares or bonds to sectors and even entire regions. Strong diversification also makes the investment success independent of individual investment areas and serves as psychological and practical support in times of market stress. Investors can have confidence there is no dependence on a single position. It makes a big difference whether you are invested with 10 percent, 1 percent or 0.1 percent if the price of a single share falls by 80 percent. In the latter case, you may not even notice it. Active investors also appreciate the flexibility that a diversified portfolio offers. It is not limited to one sector or index, but encompasses a wide range of investment opportunities worldwide. The Assenagon team emphasizes that it acts independently of a benchmark and focuses on "the greatest possible diversification across a large number of global investment themes". According to experts, traditional investments such as equities and bonds no longer automatically correlate in opposite directions. Fund managers must therefore also keep an eye on niche markets in order to compensate for weaknesses in individual areas. This results in more balanced portfolio returns.

Diversification is not only a means of reducing risk. It can also make a significant contribution to improving returns, especially in the longer-term investment horizon. Here are the main reasons why diversification is also crucial from a return perspective: 

• Smoothing out fluctuations enables constant growth

A broadly diversified portfolio reduces volatility-related losses. If a portfolio is subject to strong fluctuations in value, this can reduce the overall return - through the so-called "volatility drag": Example: a loss of -50 percent requires +100 percent to get back to the starting level. A more even return path with fewer fluctuations means that compound interest effects can work more efficiently.

• Use of uncorrelated sources of return 

Diversification across different asset classes (e.g. equities, bonds, commodities, niche themes or alternative investment strategies) or within an asset class (e.g. sectors, regions, credit ratings, factors) makes it possible to benefit from market movements that do not occur simultaneously: For example, when equity markets weaken, bonds or alternative investments can stabilize or even gain. This leads to a smoother overall return, even if individual segments temporarily disappoint. 

• Enabling tactical opportunities without cluster risk 

Those who are broadly invested can take advantage of opportunities in a more targeted manner without concentrating the portfolio heavily on a single risk: Selectively adding investment themes with higher potential returns, such as high-yield or subordinated bonds, or by increasing the equity allocation can increase the overall return. The basis for this improvement in returns is independence from the performance of individual positions. A single bond can fail, but a well-selected, diversified bond portfolio hardly ever does. 

• Reduction of wrong decisions and distribution of opportunities 

Even professional investors sometimes make mistakes when selecting the "best" asset classes or times. After all, no investor can predict the future perfectly and no one should rely on always being right in their investment strategy. Diversification reduces this risk: Rather than betting on a single winner, you benefit from the breadth of financial market trends. This increases the chance of benefiting from above-average individual developments, even if they could not be predicted exactly. 

Diversification is the key to the question posed at the outset: well-designed risk diversification allows investors to seize short-term opportunities while limiting losses in weaker phases. It smooths the return profile by cushioning extreme volatility and drawdowns. As the foundation of any investment strategy - whether active or long-term - broad diversification ensures sustainable investment success by improving the risk/reward ratio without unnecessarily restricting potential returns. Diversification does not mean sacrificing high returns - on the contrary. It creates the basis for sustainable growth, stable income streams and reduces the risk of losing sight of the goal due to individual wrong decisions. Those who diversify correctly benefit from better results in the long term.