Diversification or How to Dilute Financial Risk.

According to the RAE, diversifying is to "turn into multiple and diverse what was uniform and unique," but this definition has multiple interpretations.

From an economical point of view, we can talk about:

Diversification of markets.

When a company observes a great saturation in its usual market, a good strategy to increase its sales can be the search for new markets where it can sell its products or services.

It may also be the case of the opposite, having excess resources and finding new horizons where selling could be a magnificent opportunity to get rid of them.

Collaterally to these objectives, companies also manage to reduce their production costs.

Product diversification.

Offering new products is a way to get more out of something extremely valuable like our customer base and it can also mean expanding it by reaching new buyers.

Financial diversification:

- As an Investor, it's about reducing, "diluting" the risk of loss by distributing the investment among different products, entities, markets, sectors, time frames, etc. To understand the concept, let's make a comparison imagining that our risk is concentrated in a drop of bitter flavor, well, it won't be the same to dilute it in one or two glasses of water as it would be in the equivalent of a swimming pool. In the first case, the bitterness will be very unpleasant, in the second, it will be imperceptible, and this is what it's all about, that the impact of a possible loss is imperceptible in the whole of our investment, in our financial portfolio.

Let's put an example:

Suppose we have €10,000 saved and decide to invest them in a single product A hoping to get a return. But it turns out that in the end, not only did I not make a profit but my investment has lost value by 2% and now I could only get €9,800 for it. We will have to accept a loss of €200.

Now let's assume that we have distributed the investment among several options: €3000 in product A, €3000 in B, €4000 in C. The first one, A, we already saw that gave us a loss of 2% but the other two have given us a profit of 4% and 5% respectively. The total result of our entire investment will be as follows.

A: loss 2% of €3000= -€60

B: profit 4% of €3000=€120

C: profit 5% of €4000= €200

The total result of my entire investment portfolio will be a profit of €200+€120-€60=€260

The loss of €60 has been diluted in the total and in the set of my investment instead of a loss of €200 as in the first scenario I have obtained a profit of €260. This is the result of diversification.

 But let's specify and delve a little deeper into how to diversify, because it will depend on several factors; the first and most important, the risk we are willing to take on; it is obvious that the more risk we take on, the more advisable diversification will be, and on the contrary, if we talk about products with very low risk it won't be as necessary, but it may even be that we are willing to take on different degrees of risk and then the question will be where to invest more. Other factors come into play here such as the more or less conservative profile of each person, the level of profitability we want to achieve or the time frame for return we are looking for for our money. 

New investment options are currently emerging such as crowdfactoring platforms where diversification is inherent to their own operation. Platforms like INVERSA offer a very varied marketplace where you can choose between invoices and promissory notes from different companies, with different profitability, different risk, and varied return periods, always within the S/T (up to a maximum of 180 days).

- As a Company, it is important to diversify our financial sources to ensure that we always have enough resources to face the different expenses and investments. If we continue with the water analogy, in this case, it is about having more than one tap available so as not to be left "dry," that is, without the necessary resources.

In this case, it is about "diluting" the risk of insolvency.

Therefore, the more financing options there are in the market, the more benefited the business fabric will be, and therefore the economy in general. The emergence of crowdlending or crowdfactoring platforms represent an alternative source, another financing tap complementary to existing ones that allows improving and diversifying the company's pull and in many cases relieving situations of financial exclusion.

It is important when facing a business to have elaborated a good forecast of expenses and investments and the different sources of financing necessary both in the short, medium, and long term, as well as our capacity for bank borrowing, the policy of paying interest and tax fees, and a good plan for the amortization of fixed assets.

One of the most common mistakes is to worry only about growing without foreseeing if we are going to have the necessary resources to face what that growth will entail.

In the end, each individual or each company must make their own decisions but it is unquestionable that diversification brings financial tranquility.