Global عربي
KSA عربي
Global عربي
Every investor needs to learn how to diversify their portfolio. That means knowing how to spread your money across a variety of assets in a way that reduces overall risk. That could mean investing in different sectors, geographies, or markets.
In the post below, we think about diversifying investments from a crowdfunding perspective,
so you can maximize returns and minimize risk as you invest on the platform.
With its emphasis on large pools of small investors, crowdfunding offers excellent opportunities for diversified investing.
For example, on platforms like Funding Souq that funds SMEs, you can choose SMEs that work in different sectors, rather than funding a single project.
That allows you to balance risk. If one SME does poorly, the others may do well, potentially offsetting losses. Or if one SME is located in a country that’s hit by recession, SMEs in other geographies may not be affected.
Crowdfunding platforms make it especially easy to diversify because they tend to have low investment minimums. You can fund a project on Funding Souq, for example, for just AED/SAR 1,000 ($270).
Read more: Hedging vs. Speculation: Understanding the Difference
If you want to gain an intuitive understanding of diversification, start to consider what happens without it. Below are some of the classic risk scenarios you’ll run into, each requiring a diversification strategy to avoid losses.
Your investments are heavily concentrated in a single industry. That means that any shock to the sector will take down your holdings – anything from a cultural trend that shifts consumer behavior to supply chain disruptions can sink a specific sector practically overnight, often unpredictably.
- Example: During the COVID-19 pandemic, lockdowns and supply chain disruptions bled the profits of retail shopping and hospitality. If you were invested solely in restaurants or hotels, you may have faced huge losses, but if you were also invested in tech and healthcare, you could have fared well.
Your investments are tied to a single location, exposing them to whatever political or economic fluctuations that happen.
The risks in this case are many: new government regulations can hamper business, currency fluctuations can eat into profits, political instability might scare off investors, or regional economics could dampen business activity.
Example: In 2015, Greece defaulted on a €1.6 billion IMF payment, plunging its economy into renewed turmoil. The government issued capital controls and banking restrictions that hamstrung local businesses. If you were only backing Greek SMEs at the time, you’d likely have faced huge losses.
Businesses have different risk profiles depending on how established they are. New startups can offer explosive growth, but that comes with much higher risk as their business model and cash flows are uncertain. Blue chip stocks are the opposite. How you spread your money depends on your risk-reward appetite.
- Example: According to the Bureau of Labor Statistics (BLS), about 20% of startups fail in the first year and 50% fail by the fifth year. Established SMEs that have operated for several years have much higher survival rates.
This means your investments or funds are heavily concentrated in a single industry or even one company. Any setback that hits the firm or sector will take down your portfolio.
- Example: In 2019, coworking space startup WeWork saw its valuation collapse after it failed to hold an IPO. This didn’t just hit WeWork.
It sent shockwaves through the nascent coworking space sector, which at the time had drawn big investments but was suddenly seen as overvalued. If you were all-in on coworking, WeWork’s scrapped IPO could have been a big blow.
Some investments can be cashed out right away (meaning they’re highly liquid), and others can take years (highly illiquid). Sometimes you can’t sell your stake before a business exits or buys you out, tying your money up.
- Example: Some equity crowdfunding platforms require investors to hold their investments until there is a merger, acquisition or an IPO. You may have to hold your investments for years without a clear timeline for exiting.
Read more: Is 2025 the year to invest, or save?
Now that you’re aware of the major risks, you can spot them and form proactive strategies for avoiding or minimizing them. As a crowdfunding investor, here’s what a strong diversification strategy would look like.
Allocate funds to SMEs in different sectors. That means backing companies in tech, healthcare, manufacturing, agriculture, etc. to ensure that a downturn in one industry doesn’t drag down the whole portfolio.
- Example: Back to our COVID-19 example, if you invested in tech companies like Zoom, Amazon, or Shopify, you’d have seen huge growth as these services profited immensely from lockdowns.
This could have compensated for losses in companies like Delta Airlines, Airbnb, or J.C.Penny, all which tanked because of the same lockdowns.
Spread investments between early-stage startups that offer rapid growth potential but higher risk, and mature SMEs that have proven revenue and lower risk.
- Example: Sequoia Capital invested both in early stage startups with less proven revenue like Airbnb, and more proven startups like Dropbox. This meant they could hang on to Airbnb as it took time to mature, eventually winning big when it did.
Choose SMEs in different countries, and even different regions, rather than focusing on a single market. That will reduce your exposure to shocks in those local economies, or any political instability or regulatory changes.
- Example: In 2016, Egypt suffered a huge currency devaluation after floating its pound currency, spiking inflation and squeezing SMEs.
That same year, the UAE and Saudi Arabia were booming, with strong oil revenues and investments in tech startups, like Souq.com, which was later acquired by Amazon in 2017.
It’s smart to mix your investments between equity, where you own shares in an SME, and debt-based investments, where you lend money or invest in their debt.
Equity investments offer higher potential return but may take longer to exit. Debt investments typically often have lower return but offer steady cash flow.
- Example: Suppose you have $5000 to invest on crowdfunding platforms. You invest $3000 into the equity of a software startup and $2000 into the debt of a more established food distributor. If the software company takes time to start generating returns, you’ll still have steady income from the food distributor’s payments.
Crowdfunding platforms like Funding Souq make diversifying extremely easy. When selecting SMEs, filter for different sectors and risk grades.
- Pro tip: Look at the credit ratings assigned to different companies, so you can mix and match risk and reward.
Read more about: What Is Credit Risk & How Is It Measured?
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
