Investment portfolio: invest in diamonds too for less risk

What kind of things are included in your current investment portfolio? Shares, bonds? What about raw materials, like diamonds? There is every chance you are at least considering this, as you’re currently reading this text. And even more so if you happen to live in China or India. A total of 45% and 50% of the respective populations are considering diamonds as an investment, according to the 2013 Global Diamond Report issued by the Bain & Company consultancy.

And who could blame you. Diamonds offer many advantages for improving an investment portfolio. For example because their value will steadily continue to increase over the years and won’t be sensitive to inflation. After all, they won’t evolve with other investment products. This makes the gemstones ideal for applying the golden rule of investing: diversify, diversify, diversify. What effect can the addition have on your investment success?

  • Maximise the expected return on your investment portfolio, minimise the future fluctuations.
  • Invest in asset classes which will evolve as independently as possible. Their fluctuations will subsequently compensate for each other more effectively.
  • Portfolios from a Norwegian study minimally achieved the market return at less risk by investing in both shares and diamonds.
  • Diversification is the golden investment rule: in various different, unrelated asset classes, several economic regions and sectors – and diamonds too!

The diamond price is rising nicely, as this interim score shows on 10th April 2018.

Key to a successful investment portfolio

You must dare to take a higher risk in order to realise higher returns. This is something no investor can get around. You therefore need to opt for a combination of risk and return. Once you have made this choice for yourself, it’s all about maximising the expected, total return of your portfolio, whilst at the same time minimising the future total fluctuations.

The traditional, yet still effective, way of being successful in this regard was also indicated by the American economist Harry Markowitz back in 1952. At that time he launched an approach which may sound obvious today, but it certainly wasn’t back then and it even resulted in him being awarded the Nobel Prize for Economics.

His method’s core idea was that you would be best off investing in asset classes which would evolve as independently from each other as possible for a maximum return at a minimum risk. In professional terms: as little correlation as possible. Their individual, future fluctuations would subsequently be able to compensate for each other more effectively, making sure the total risk would decrease for the same expected return.

Diversify with investment diamonds?

An asset class like this, which doesn’t correlate a great deal with other forms of investment, surely that could be a diamond too? Is that right? Increase the total return and reduce the total risk by adding diamonds to an investment portfolio? We found an interesting study, conducted by the Norwegian University or Nordland, regarding this subject. This study tested the theory: what is the effect when you add diamonds as an investment to a portfolio which has a diversified investment in shares?

Three pairs of portfolios were put together for this study: the first pair focussed on developed countries, the second on the United States and the third on the so-called BRIC countries. The latter are the developing economies of Brazil, Russia, India and China. Each portfolio invests in shares, in a version with and a version without diamonds. The investments are already diversified in their own right, as is explained below. The investment horizon was set to 9 years, from 2005 to 2013. Realistic figures from that period were naturally used for the study.

How do these investment portfolios work?

  • Investment portfolio for developed countries (outside the United States): these were chosen in accordance with the high credit ratings (which, in turn, form an opinion about the country’s creditworthiness), a stable outlook and an interesting GDP per capita. In addition, a strong industry was selected per country: Norway (oil and gas), Luxembourg (materials) and Singapore (telecom). This selection took place in accordance with global financial rankings, such as the Forbes Global 2000. Eventually an investment was made within each of the selected sectors, in shares of companies which were realising the best results at the time.
  • Investment portfolio for the United States: a separate portfolio was put together for this country, in line with the same criteria as set out above. After all, several American companies were leaders in most sectors at the time. The chosen industries were here: oil and gas, retail, finance and telecom.
  • Investment portfolio for emerging markets: the BRIC countries were opted for here: China (oil and gas), Brazil (oil refinery), India (mining, crude oil) and Russia (banking sector).
  • The variants in both portfolios contain the following diamonds: cut quality: round; carat: 1.00 to 1.49, colour: D-K; purity: Internally Flawless (IF) to Included, category I1. You can read more about the quality criteria for diamonds here.

The composition of the portfolios was therefore worked on with a solid professional knowledge, as were the calculations to realise their performance. We would be digressing too much if we took a more detailed look at these steps now. Please do take a look at the study yourself, if you would like to know more, but do prepare yourself for a solid portion of statistics.

The return and the risk of the portfolios naturally needed to be compared to the market. The MSCI World Index was used as the benchmark for the developed countries, including the United States. Contrary to what the name suggests, this only contains shares from developed countries. Hence the fact the BRIC portfolios are compared to the MSCI Emerging Markets Index.

What consequence does adding investment diamonds have?

  • Investment portfolios for developed countries (outside of the United States): the expected return was 11% here, so higher than the 7% market return. The risk was better too: this also amounted to 11%, or 2% below the 13% market risk. However, if diamonds were invested in too, the total risk would only amount to 4.3%, so a great deal less than the market risk. In that case the expected return was 7%, or in other words, the same as the market.
  • Investment portfolios for the United States: the total risk amounted to 3.5% without diamonds and with diamonds it was 3.2%. So a minor difference, but in both cases the risk was lower than the market risk, which amounted to 13%. The expected return was twice 7%, or the same as the market return.
  • Investment portfolios for emerging markets: the total risk was 24% if no investments were made in diamonds. If investments were made, the risk would be 7.2%, so significantly lower than the 36% market risk. The expected return amounted to 14% in both cases, just like the market return.

The diamond effect demonstrated!

It goes without saying how these portfolios performed are no guarantee for the investments you make today. We therefore won’t be issuing investment advice based on this. However, what we would like to demonstrate is the crystal clear positive effect diamonds have on the risk.

The first portfolio for developed countries (outside of the United States) already resulted in higher returns for less risk without diamonds, compared to the market. After all, the investments were spread across three countries and three companies from different sectors. But add the diamond into the equation and that same market return is earned at a still relatively lower risk.

Both portfolios for the United States resulted in the same expected market return, but each at a lower risk than the market. The risk difference with or without diamonds was negligible.

Investments in the BRIC countries always meant an increased risk at the time. But the portfolio with diamonds was much less risky than the market, for the same eventual returns.

This is naturally only the beginning

The combination of shares and diamonds, like in the Norwegian study, is only the very start of diversification. You would be best off also investing in other asset classes and in several economic sectors and regions in order to optimally spread out your investment portfolio. Your investments should also be spread out over time, for example per month or quarter. And monitor whether the assets are actually evolving independently.

Optimal investments, in order to realise an expected return at a desired risk, is by no means a simple process. You need to know exactly what your investment products entail in order to realise optimal diversification, making sure you can detect any possible relationships. Plus it’s important for you to invest in asset classes which together will result in the required risk and return. One investment may be riskier than the next, but could possibly also result in a higher return. So what is the right combination?

Make sure you obtain advice from the bank in order to answer that question, unless investments are a daily passion of yours. The bank may possibly suggest opting for certain investment funds. These products will invest in several companies, sectors, countries ... They will therefore be doing a great deal of the spreading work on your behalf.

Add the secret ingredient

But. There is one thing financial institutions won’t be adding to their portfolios and you are now familiar with its positive effect: the diamond. Investing in diamonds is best done via BAUNAT DIAMONDS.

We can offer four investment options, always at sale prices which are unequalled within the market, thanks to our Smart Buy purchase philosophy:

  • Make your own selection from our certified, top quality and guaranteed conflict-free diamonds, after which you can instantly order them online.
  • Request a no obligation quotation, if you can’t find what you like online. You will receive a personalised proposal within 24 hours.
  • Opt for a package of certified loose diamonds, customised in line with your investment requirements and budget.
  • Or invest in specials, also known as exclusive, extraordinarily rare diamonds. Your best option here would be a long-term investment.

Convinced of the added value diamonds can offer for your investment portfolio? Then add these gemstones today, via our investment options.

Author: Tom Dejonghe
Source: BAUNAT

With this article, BAUNAT strives to inform you thoroughly about investing in diamonds. No investment can be guaranteed to be without risk or fully according to your expectations. That is why we recommend to research the risks and aspects of investing in diamond properly to ensure that you make the right choice for your portfolio.

START TO INVEST See our selection of loose diamonds

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