What does diversification mean?

Diversification in investing means spreading risk by making investments in different financial products. A diversified portfolio is created through the combination of various types of assets.

What does optimal diversification look like?

A perfectly diversified portfolio that prepares a professional or private investor for every possible market scenario does not exist. However, distributing assets across different investment classes and applying appropriate risk weighting can significantly improve portfolio stability.

With a specially designed all-weather investment strategy, it is even possible to achieve returns similar to pure stock investments while taking on only one-third of the risk associated with them.

Simply put: Returns and security go hand in hand

Put simply, maximizing returns while ensuring high security in an investment is usually not possible. In other words, those seeking maximum security in their investments should not chase the highest returns but rather be satisfied with lower yet more realistic figures for value development.

Saving and security in investments

Many potential investors never take the step into investing because they want to avoid any risk when managing their savings. As a result, their money often remains in a savings account or is parked in a fixed-term deposit or a flexible daily savings account.

In reality, no one has to completely avoid these forms of investment. On the contrary, experienced financial advisors even recommend keeping at least two to three months’ worth of salary in flexible checking or savings accounts. This ensures there is always enough liquidity available for unexpected expenses, such as car repairs or replacing a broken washing machine. Investments should primarily involve capital that can be set aside or specifically saved for retirement.

How can investors diversify their assets?

First, investors should have a clear understanding of their goals and investment horizon. When it comes to risk diversification, it does not matter whether 100 euros are saved each month over several years or a one-time inheritance of 250,000 euros is invested. In both cases, a well-balanced investment structure should be maintained. A variety of asset classes are available for this purpose:

• Bank deposits, savings accounts, fixed-term deposits, daily savings accounts
• Stocks
• Investment funds, equity funds, bond funds, mixed funds, ETFs (index funds)
• Bonds, pension securities, fixed-income securities
• Commodities, precious metals, gold
• Real estate, real estate funds, REITs
• Private equity, tangible assets
• Crowdfinancing (investments in private loans, corporate loans, real estate)
• Cryptocurrencies

The 3-step rule of thumb for diversification

1. Secure and relatively liquid deposits form the foundation of wealth (savings accounts, fixed-term deposits, daily savings accounts).
2. For medium- to long-term wealth building, capital- and income-generating investments are added (fixed-income securities, investment funds, ETFs, real estate funds, dividend stocks).
3. High-yield and opportunity-rich investments are included to achieve a higher overall return (stocks, commodities, private equity, crowdinvesting, cryptocurrencies).

In all investment forms, assets should be selected strategically from different regions (Europe, USA, emerging markets) and industries (industry, services, technology, real estate).

Avoiding concentration risk in diversification

Concentration risk arises when investment capital is allocated to only one or a few investments. Many people who prefer safe investment options tend to put their money into real estate, also known as “concrete gold.” The housing market has been turbulent in recent years, with rising interest rates and economic fluctuations further emphasizing the importance of diversification.

Owning a home for personal use was traditionally seen as a way to eliminate rent expenses, but changing market conditions mean this is no longer always the case.

However, problems can arise when real estate is purchased solely for rental purposes. Many investors underestimate the effort required for property management, the risk of rental vacancies, and the costs of renovations and maintenance. A better approach is to invest in real estate funds or stocks of real estate companies, as these investments allow investors to exit the market more easily.

“Diversification is protection against ignorance. It makes little sense for those who know what they are doing.” (Warren Buffett)

Other scenarios for concentration risk can arise from investing solely in the stocks of one company, government bonds from a single country, or turning to gold as an overreaction to an economic downturn. For example, shareholders of major energy providers faced difficulties due to the energy transition, while investors holding Volkswagen securities were affected by the emissions scandal. However, this does not mean that owning shares in the automotive industry is inherently bad. Simply spreading investments across multiple car manufacturers would have provided significant diversification.

The same applies to government bonds. Those who buy only highly secure German federal bonds face virtually no risk of default but also earn no interest. Purchasing bonds from emerging markets or stocks from companies based in these regions offers the potential for higher returns but also comes with greater volatility. This is why diversification within a portfolio is always essential.

The guiding principle for investors should be: prioritize bonds from stable countries that at least preserve wealth, while selectively incorporating high-yield bonds from emerging markets to take advantage of return peaks.

Examples of diversification in a portfolio

There are numerous examples of well-balanced portfolios. These can serve as guidelines for private investors but should always be tailored to individual needs, goals, and life circumstances.

For instance, investors who are close to retirement should invest less in stocks or long-term tangible assets. Instead, their wealth should already be shifted toward safer asset classes such as fixed-income securities, savings accounts, or real estate.

• Investors who want to build wealth and are willing to take on controlled risks.
• Investors who primarily seek inflation protection and aim to preserve the value of their assets.

A common recommendation for portfolio diversification is to allocate each asset category in equal parts. This results in a wealth structure composed of 25% stocks, 25% bonds, 25% cash, and 25% gold. Precious metals primarily serve as a safeguard, acting as the “last resort” in case all markets crash and cash holdings lose value due to inflation.

How to stay organized while diversifying

As a complement to an investment portfolio, real estate, commodities, or crowdfinancing investments can be included. Younger investors, in particular, may benefit from a higher proportion of stocks and a lower allocation to precious metals as a safeguard (5-10%).

It is also advisable to combine investments with government or employer-sponsored funding programs, such as occupational retirement plans, which have received mixed reviews. The financial benefits, such as direct subsidies or tax advantages, should not be overlooked. A personally owned property also serves as a secure asset but is not typically considered an investment in a diversified portfolio.

To keep track of different investments and assets, it is essential to consolidate them into an organized overview.

Why diversifying risk in investments makes sense

A well-diversified portfolio reduces overall investment risk. This means that the average risk of the entire portfolio is lower than the average risk of the highest-yielding asset classes. At the same time, a diversified portfolio offers higher overall returns compared to safer investments like bank deposits or fixed-income securities.

At invesdor, investors can efficiently diversify their portfolios through three investment types, each catering to different investment strategies. To learn more about these options, check out our guide: What’s the difference between debt, equity, and convertible bonds?

Additionally, you can explore our open funding rounds for high-yield investment opportunities.

Keep in mind that even if you feel well-informed, you may not be aware of every detail regarding an investment opportunity. Or, as a famous star investor once put it:

“Diversification is protection against ignorance. It makes little sense for those who know what they are doing.” (Warren Buffett)

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Once a year, IEX – from investors for investors – awards the Golden Bull. The nominations and final awards give investors an indication of which financial service provider offers the most value for money in the eyes of the jury and/or private investor. This makes the vast array of investment products and services more manageable for consumers. In the “Crowdfunding Platform of the Year 2023” category, a party that was not yet operating under the name Reliance in 2023, won. Before November, we knew this party as Oneplanetcrowd, a platform for sustainable investments that has been around since 2012. European-based Reliance was already active in Germany, Austria and Finland before acquiring Dutch-based Oneplanetcrowd. The merger makes them the largest pan-European investment platform for sustainable, social businesses.    

Expert jury sees Reliance as an example for the industry

According to the jury, Reliance is “a good example of where things are heading” in the crowdfunding market, following the introduction of the mandatory European ECSP license. Oneplanetcrowd already obtained that license in 2022 as the second Dutch platform. “By acquiring Oneplanetcrowd, Reliance shows as one of the first parties what is possible with the new European passport in hand,” the jury said. The merger gives Dutch investors access to an extensive network of investors in Europe and enables investors to better diversify their portfolio of investments. In this way, invesdor/Oneplanetcrowd actually makes use of the European rules and is, in the eyes of the jury, an example for the sector. 

More reasons for a Golden Bull 

Investors benefit directly from the merger: at invesdor, entrepreneurs pay the fees, completely eliminating the 0.8% management fee previously charged by Oneplanetcrowd. The jury was also charmed by invesdor’s “Acadamy”, where investors can gain knowledge and insights about crowdfunding, using the platform and managing an investment clause. The large mandate it obtained for a $10 million civic participation program (Windpark Fryslân) combined with the unchanged mission of offering ‘double returns’ (financial and social) ensures that the jury wholeheartedly awarded this annual award to invesdor.  

“The IEX Golden Bull is a great recognition of our investors and entrepreneurs. We are very proud and honored. It also feels like the icing on the cake after Oneplanetcrowd merged with invesdor, making us now the largest impact investment platform in Europe,” said Maarten de Jong. 

The Golden Bull has been awarded annually since 2007 by an independent professional jury to brokers, asset managers and other financial institutions for their exceptional performance. The Golden Bull is an initiative of IEX Media, a cross-media investment platform with a monthly reach of 2.5 million private investors in the Netherlands and Belgium. 

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‘That the world needs change is beyond question,’ says Reliance CEO Christopher Grätz. He also emphasizes, ‘But it won’t change on its own – someone has to take action. And, above all, someone has to finance it.’ As a pan-European impact investing platform that emerged from the merger of several platforms from different European countries, Reliance has focused on one key question: If the most significant progress in the world is made by adventurous, entrepreneurial individuals who have the courage to think differently, what if we gave this opportunity to everyone? The opportunity to decide what kind of future they want to pursue? The chance to choose which companies can bring about this change? And the chance to participate in financing it all?

At invesdor, we believe that investors can shape their future by investing in companies they believe in. This forms the basis of our call to investors: Let’s finance the future together. People have long decided – as shown by societal trends in recent years – what this future should look like: more sustainable, more equal, and more responsible. ‘Sustainability is a huge market, with corresponding massive interest and investment capital,’ says Christopher Grätz.

With the merger with Oneplanetcrowd, Reliance has positioned itself as a leading European impact investing platform: Oneplanetcrowd has long pursued a targeted impact strategy, focusing exclusively on projects that have a clear impact on one of the 17 United Nations Sustainable Development Goals (SDGs).

In the meantime, the entire Reliance Group has set the goal of presenting investors exclusively with projects that contribute to a sustainable world of the future. To achieve this, we have formulated two essential sustainability guidelines:

1. All Reliance issuers and their projects undergo an ESG risk assessment before being listed.
2. For all projects, the impact on at least one of the mentioned SDGs is determined through measurable Key Performance Indicators (KPIs). The ‘Oneplanet’ label highlights outstanding projects.

We take these guidelines very seriously – they have the same priority for us as credit risk policy does for loans and investment policy does for equity projects.

ESG: Responsible in Three Areas

ESG is one of the aspects at the core of invesdor’s guidelines for sustainable investing. The abbreviation stands for Environmental, Social, and Governance and refers to the three central factors for measuring the sustainability of an investment. Environmental criteria (represented by the ‘E’ in ESG) address how a company contributes to solving environmental issues (e.g., waste, pollution, greenhouse gases, deforestation, and climate change). Social criteria (the ‘S’ in ESG) relate to the treatment of employees and customers by the respective company (e.g., human capital management, diversity and equal opportunity, working conditions, health, and safety as well as misleading sales). Governance criteria (the ‘G’) examine how a company is managed (e.g., executive compensation, tax practices and strategy, corruption and bribery, as well as diversity and structure).

The growing importance of ESG in finance is based on the simple idea that companies deliver high returns when they create value for their stakeholders – employees, customers, suppliers, and society as a whole – and not just for the company’s owners.

How Reliance Assesses ESG Risks

The ESG analysis can be complex. When considering ESG factors, it is not only about evaluating the products and services of a company but also its behavior, its supply chain, and other aspects related to its corporate governance. As part of our ESG risk assessment, we investigate whether the company has negative impacts on sustainability factors such as environmental, social, and labor issues, respect for human rights, and the fight against corruption and bribery. In addition, we assess whether a company is exposed to serious sustainability risks, meaning an ecological, social, or governance event or condition that could significantly impair the value of the investment if it were to occur.

The goal of the ESG risk analysis is to identify both risks and opportunities and thus uncover potential areas for improvement. At invesdor, we firmly believe that a more forward-looking and dynamic approach is needed when evaluating ESG risks and opportunities. Furthermore, an ideal analysis should not only consider the latest ESG data but also the company’s strategy, overall impact, and evidence that it adheres to its promises and standards. It should also include a forward-looking perspective, so that investment decisions are not based solely on historical data.

The ESG risk assessment is a free analysis that Reliance conducts for every new project that is to be placed on the platform. The goal of this assessment is to answer the following two questions:

1. Does the project harm the environment, society, and/or stakeholders?
2. Could the value of this project be jeopardized by ESG developments?

If the answer to either of these questions is ‘Yes,’ the project will not be included on the Reliance platform.

The table below contains some examples for each of the ESG criteria:

The 6 environmental objectives of the EU, as defined in the Taxonomy Regulation, are:

1. Mitigation of climate change,
2. Adaptation to climate change,
3. Sustainable use and protection of water and marine resources,
4. Transition to a circular economy,
5. Prevention and reduction of environmental pollution, and
6. Protection and restoration of biodiversity and ecosystems.

Impact: Doing Good – and How Reliance Measures It

The potential of companies or projects in terms of impact investing is also part of invesdor’s sustainability guidelines. Impact investing means investing in something that measurably contributes to one of the goals for sustainable development, the aforementioned SDGs. It is a form of sustainable investing that goes beyond simply excluding companies or countries. With impact investing, investors achieve not only financial returns but also a positive sustainable impact. ‘Reliance decided to use the SDGs as a framework for determining intended and realized impacts,’ explains Christopher Grätz. The SDGs serve as a blueprint for addressing the biggest societal challenges of our time, such as combating diseases (SDG 3) and renewable energy (SDG 7). Together, the SDGs form a roadmap for achieving peace and prosperity for people and the planet, now and in the future. ‘Reliance only awards the impact label to companies in the financial sector that make a positive contribution to at least one of the SDGs,’ says the Reliance CEO.

Where Reliance Draws Red Lines in Terms of ESG and SDGs

To emphasize that Reliance does not compromise in certain areas, we have identified specific services, products, and sectors that are under no circumstances acceptable for the platform and thus cross the red lines. As such no-gos, Reliance excludes projects from companies that:

• Are involved in the production, marketing, or sale of tobacco and cannabis products for recreational use.
• Are involved in the gambling industry or provide services in this sector.
• Manufacture weapons, specifically designed components for weapons, or provide weapons-related services. Companies involved in the production or sale of dual-use technologies. Dual-use technologies are subject to strict scrutiny, as their products must not be intended to inflict physical harm on humans or animals or contribute to such harm.
• Have a high risk of using conflict minerals or those who mine and supply such minerals without making efforts to source conflict-free minerals. Reliance also requires this from its suppliers.
• Operate in the sex industry.
• Conduct animal testing that is only acceptable for legitimate medical purposes, and Reliance does not place companies that do not conduct carefully controlled animal testing based on the principles of ‘reduce, refine, replace.’
• Use animal products or ingredients and do not have animal welfare policies and practices that go beyond legal requirements. We prefer companies that have clear goals for improving animal welfare and actively advocate for better animal welfare standards in the industry, as well as companies that offer plant-based alternatives for the production or use of animal products.
• Do not contribute to sustainable fishing and aquaculture practices.
• Are involved in the production and sale of fur and specialty leather for which animals are bred.
• Cause extensive or repeated damage to biodiversity or are in businesses with a high potential risk of causing such damage without managing these risks.
• Show no awareness of deforestation, do not practice sustainable forestry, and do not source and use responsible forestry products.
• Are unaware of climate change and do not make credible efforts to eliminate their greenhouse gas emissions and find alternatives to non-reducible emissions as quickly as possible.
• Are unaware of the dangers of using hazardous substances and do not contribute to the introduction, development, and promotion of less harmful alternatives.
• Are involved in accounting irregularities or irregularities in compensation that raise significant ethical and moral concerns.
• Offer excessive compensation and remuneration packages for directors that do not comply with local or international standards for best practices.
• Are involved in irregularities related to corruption, bribery, or money laundering.
• Engage in tax avoidance schemes that raise serious ethical or moral concerns and clearly violate local or international standards.
• Are involved in violations of laws and regulations, codes of conduct, or conventions, unless there are indications of structural change within the company that lead to fundamental behavioral changes.

We believe that with the Reliance investment guidelines, we can contribute to perhaps the most pressing issue of our time: the transition to a more sustainable, equitable, and responsible economy.

The post Sustainability: How Reliance Implements ESG, SDGs, and More first appeared on Reliance - Blog.

Reliance Group operates two digital investment platforms: reliancetrade.org and Finnest.com. Of the two platforms, reliancetrade.org offers mostly equity issues by Finnish and Nordic companies, whereas Finnest is more specialized in mezzanine funding and their target companies are mostly from the German-speaking DACH market.

The numbers detailed below* provide the combined statistics for the two platforms from the year 2020. We reported the wrong number regarding the total funding raised in the final newsletter of 2020: one of the numbers used was taken from a wrong datapoint due to human error. The actual number was higher – we apologize for the mistake.

• Funding rounds on the Group platforms raised a total of $29,692,054.
• Average figure raised by a funding round was approx. $957,800.
• Eleven funding rounds raised more than $1M. Of these, four rounds passed the $2M mark.
• 31 funding rounds (18 on reliancetrade.org **, 13 on Finnest.com). 
• Share of funding rounds that reached their minimum target: 88.8%. ***
• 6,110 investment transactions took place.
• Average investment size was ca. $4,860.

Some funding rounds from last year are worthy of a special mention. On the Reliance platform, medtech company Injeq raised $2M with their third equity issue: with this, they became the first company to have raised more than $5M in total via reliancetrade.org. In addition, Reliance introduced some historic rounds with the first equity issues (Biogena, Neoh) and bond issues (PV-Invest) from Austrian companies on the platform.

On the Finnest platform, the Group’s first ever funding round using a participatory capital instrument was introduced. The target company was Hüffermann Krandienst GmbH: their part-cap round successfully raised $637,000. In addition, Biogena GmbH continued their long-running co-operation with Finnest with their 13th funding round on the platform.

* The numbers include investment that succeeded and were finalized. Refunds made in funding rounds that did not meet their minimum target, have been excluded. 

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