When people hear the words "investments" and "investors," many still picture very wealthy individuals, funds or corporations with large sums of free capital at their disposal. Today, investment opportunities are far more accessible, and private individuals with comparatively modest amounts are increasingly starting to build their own portfolios. Yet regardless of the amount invested, one success factor remains constant: investment portfolio diversification.

In this article, Kristiāns Purviņš, Head of the TWINO Investment Platform, looks at what diversification means in practice, why it matters so much, what a balanced investment allocation might look like across different budget scenarios, and how to avoid some of the most common diversification mistakes.

What is portfolio diversification and why does it matter?

The simplest way to explain portfolio diversification is the age-old wisdom: "don't put all your eggs in one basket."

Investment portfolio diversification means spreading investments across different assets, terms and risk levels. This approach helps reduce risk and the impact of volatility over the long term. In other words, it is about managing risk by avoiding a portfolio that is entirely dependent on a single market, sector or financial instrument.

Diversification can occur across several dimensions:

• Between different asset classes,

• Between different geographic regions,

• Between different investment terms,

• Between different risk levels.

The more balanced the allocation of investments, the more resilient the portfolio tends to be against market volatility.

The most common investment types and their risk levels

To build a balanced portfolio, it is first important to understand the risk levels associated with different investment instruments.

Savings accounts and deposits carry very low risk and offer stable but modest returns.

Government bonds are similarly low-risk and serve as a relatively safe income instrument. Corporate bonds sit at a low to moderate risk level, offering higher returns in exchange for somewhat greater uncertainty.

ETF funds fall in the moderate range, providing broad diversification within a single instrument. Equities carry moderate to high risk but offer strong growth potential, with the trade-off being exposure to market volatility.

Real estate is a moderate-risk asset valued for its stability over the long term. Asset-backed securities (ABS) also sit at a moderate risk level and can generate regular income secured by underlying assets.

It is important to understand that no instrument is entirely without risk. For this reason, investors typically build portfolios in which different assets complement one another.

Investment term and risk tolerance

Two key factors determine the structure of a portfolio: investment term and the investor's risk tolerance.

Investment term refers to the length of time an investor plans to hold their investments.

• Short term — up to 3 years,

• Medium term — 3 to 7 years,

• Long term — 10 or more years.

The longer the investment term, the greater the volatility an investor can typically afford. This means the portfolio can carry a higher proportion of equities.

For shorter terms, more stable instruments are generally more appropriate.

The second factor is risk tolerance — that is, how large a decline in portfolio value an investor is prepared to accept.

For some investors, a 10% drop in portfolio value is acceptable; for others, it causes significant stress. This is precisely why portfolio diversification looks very different from one investor to the next.

When is it smart to start investing?

Is it actually sensible to start investing when your budget is limited and only a small amount remains after covering everyday expenses?

The answer, in most cases, is yes. The earlier a person starts investing, the greater the benefit of the time factor. Even €50 or €100 per month can grow into substantial capital over the long term, particularly thanks to the compound interest effect.

The most important prerequisite before starting to invest is building a financial safety net — typically savings covering at least 3–6 months of expenses.

Portfolio diversification examples

Let us look at what portfolio allocation might look like across different investor budget scenarios.

If you can invest up to €100 per month

When starting with smaller amounts, simplicity and low costs are paramount.

A possible allocation:

• 70% global equity ETF,

• 20% bond ETF,

• 10% alternative investments (for example, ABS or other structured instruments).

This approach allows investors to gradually build a diversified portfolio even with modest capital.

In addition to traditional investments, alternative financial instruments — such as asset-backed securities (ABS) — are increasingly being incorporated into portfolios. These are available on digital investment platforms such as TWINO, where investors put capital into a security backed by a loan portfolio rather than a single individual loan.

If you can invest €300–€500 per month

With a larger investment amount, a broader portfolio structure becomes possible.

For example:

• 50% equity ETFs,

• 20% bonds,

• 15% real estate funds,

• 15% alternative investments.

In this case, portfolio diversification already spans multiple asset classes, enabling even more effective risk distribution.

If you can invest more than €500 per month

With larger amounts, the portfolio can be built with even greater strategic depth.

For example:

• 40% global equities,

• 15% emerging market equities,

• 20% bonds,

• 10% real estate funds,

• 15% alternative investments.

At this level, the investment allocation becomes a long-term capital-building strategy in its own right.

The most common portfolio diversification mistakes

Although investment portfolio diversification is not inherently complicated, investors frequently make several typical mistakes in practice.

Excessive concentration in a single asset

One of the most common mistakes is placing too much confidence in one particular investment — a popular technology company, the equity market of a single country, or even one real estate project.

Even if a specific asset appears highly promising, excessive concentration significantly increases risk. The whole point of diversification is precisely the opposite: spreading capital so that a single poor investment does not materially affect the entire portfolio.

"False" diversification

Sometimes investors believe their portfolio is diversified because it contains many different instruments — when in reality, those instruments may be very similar.

For example, if an investor buys several different technology sector equity funds, the portfolio remains heavily dependent on a single sector.

Effective portfolio diversification means investing across different asset classes — equities, bonds, real estate, and alternative instruments, for instance.

An overly complex portfolio

Another common mistake is building a portfolio that is too complex, particularly for investors with smaller amounts.

If, say, €100 per month is allocated to investments, a portfolio of ten different instruments may create more problems than benefits — commission fees, management costs and similar expenses can even outweigh the potential gains.

In many cases, a simpler approach — such as combining a broad equity ETF with a few other instruments — can be far more effective.

Not reviewing the portfolio regularly

Diversification is not a one-time event. Over time, the value of different assets changes, and the original portfolio allocation can shift considerably.

For this reason, investors are advised to review their portfolio periodically and, where necessary, carry out rebalancing — restoring the original investment allocation.

What returns might an investor expect?

Investment returns are never guaranteed, but historical financial market data allows a rough picture to be formed.

Equities have historically delivered approximate average annual returns of 7–10%, while bonds tend to fall in the 3–6% range. Real estate typically yields around 4–7% per year. A well-diversified portfolio combining these asset classes has historically returned around 5–8% annually.

As the comparison shows, a diversified portfolio is rightly considered a balanced approach — it combines growth potential with relative stability.

The compound interest effect also plays a significant role in long-term investment returns.

For example, if an investor contributes €300 per month and the portfolio's average annual return is 6%, theoretically such a portfolio could reach:

• Around €49,000 after 10 years,

• Around €139,000 after 20 years,

• Around €301,000 after 30 years.

In conclusion

Portfolio diversification is one of the most important principles in investing. It helps to spread risk, stabilise portfolio volatility, and build a sustainable investment strategy.

Regardless of whether an investor puts in €100 or €500 per month, a thoughtful allocation of investments across different asset classes can significantly improve portfolio resilience.

In the long run, disciplined investing, regular contributions and well-considered portfolio diversification help build a more balanced portfolio, reduce concentration risk and create a more resilient portfolio structure.

Email: [email protected]

Address: Dzirnavu iela 42, Riga, LV-1010, Latvia

This material is informational and is not an individual investment recommendation.