Diversification of risks in high-yield investments

On websites of all the companies, that provide investments and other kinds of putting up money there is such information as "Investment of money is a risk, invest only the amount of money, that you are not afraid to lose". And they are right, many investors lose their money because the forex is a highly-profitable market and the loss of money is inevitable there.

But if there are extremely high risks, why do many people invest their money there? It is just because the return on investment on such highly liquid financial markets is many times higher than classical types of investment, such as putting money into a bank, funds, gold etc.

We should diversify risks as much as possible qualitatively by means of putting money in different ways to protect our savings.

What is diversification?

The classical definition says: diversification is spreading of investments to different financial tools. Thus, we don’t put all our money in one basket, but we divide it into different places. And even if one of them stops to bring a profit or to pay the money back, other projects will make up these losses.

The importance of diversification of risks

You can earn money from investing in the Internet only if you spread your portfolio between investment companies with due quality.

First of all, you should understand, it is not a bank it is a high-yield investments and your money is not insured there. In the case when a company refuses to discharge its duties, it is almost impossible to take your investments back (generally, it is always impossible).

That’s why investments should be divided between companies proportionally. Certainly, you can divide them equally for each project, but the best option of good diversification is to determine the upper and lower limits for one company.

Thus, a more perspective project gets more money and less perspective one gets less money accordingly. On the one hand, it helps to minimize the losses, but on the other hand, you don’t miss the company, which seems not very attractive at the first sight, but then it can become successful.

Diversification of risks in PAMM investment

Your PAMM (Percent Allocation Management Module) investment should include two directions of diversification:

•    Diversification in different financial companies:

•    Diversification in different PAMM accounts.

In the first case, you invest money in different companies and don’t restrict yourself by working with only one forex broker. It is called diversification of nonfinancial risks. It means there are more political and fraud risks, that can influence nonpayment of the money by a company or dissolution of a company at all.

Such risks happen rarely enough, but they have catastrophic consequences. So probably you can lose all your savings if you don’t obey the rule of diversification.

In the second case, the money should be divided between different managers properly to decrease risks. That’s why, even if one of the traders gets a loss, others will make up it and you won’t lose your savings.

Besides dividing the money between different managers, the matter of choosing managers is also very important. We made the rating scale to help people to choose PAMM accounts. It assists in estimating the trader's work in the dynamics by the profitability level as well as by potential risks.

Thus, diversification of risks in PAMM investment let you restrain the level of potential losses and protect the invested money.

Besides, for instance, the PAMM broker PrivateFX has the restraining losses function. It is a very important tool when choosing PAMM accounts, that won’t let lose more than the fixed level. For example, the restraining losses level of 50% means when your money gains this level, the deal is over automatically.

Diversification of risks in different financial tools

Nowadays the investment market has a quite big variety. Although your investment tool brings you much bigger profit than others in which you can potentially invest the money, you shouldn’t work only with it.

If you want to have an investment portfolio, where risks are minimized and the profitable level is still pretty high, you should put your money in different projects. Besides, low-yielding bank certificates of deposit certainly should be in an investment portfolio. They are a safety cushion and you can always count on them.

Thus, if you take into consideration diversification of risks when you make an investment portfolio, you will get a quite high level of profit and risks will be under control.