March 1, 2023
Calculate Your Investment Portfolio Diversification With Strabo
Table of contents
Investment App for Beginners in the UK
Introduction
What is Portfolio Diversification and Why Is It Important for Investors
Introduction:
Portfolio diversification is a key component of any well-rounded investment strategy. It involves investing in different types of assets, such as stocks, bonds, commodities and real estate, in order to limit risk and maximise potential returns with the least amount of volatility. By spreading investments across different asset classes, investors are able to reduce their exposure to losses in any single sector and also benefit from the returns of different asset classes. This helps to ensure that a portfolio is well balanced and can withstand market downturns. Modern Portfolio Theory dictates that diversification allows investors to maintain their expected return, while reducing the risk of their portfolio. It is therefore vitally important to understand.
Specifically, diversifying investments within each asset class can be beneficial for investors. For example, an investor may invest in both large-cap stocks and small-cap stocks to reduce concentration risk in their portfolio. Or, an investor may choose to invest in different sectors such as technology, healthcare and energy in order to reduce the risk of their portfolio being overly concentrated in one particular sector. By diversifying investments across asset classes and within each asset class, investors can ensure that they are taking advantage of all potential opportunities while still reducing their risk exposure.
Understanding the Different Types of Risk Associated with Investments
In addition to understanding the importance of diversification, it is also important for investors to understand the various types of risk associated with investments. Generally speaking, there are 4 main types of risk that investors must be aware of: market risk, credit risk, liquidity risk and operational risk.
- Market Risk is the chance that an investment’s value will decrease due to changes in the overall economy.
- Credit Risk is the chance that an issuer of a security will not be able to make principal and interest payments.
- Liquidity Risk is the risk that an investor may not be able to quickly sell their investments at a reasonable price.
- Operational Risk is the risk associated with processes and systems used by a financial institution, such as those
Identifying Which Asset Classes you Should Diversify Into
Once an investor has a basic understanding of the risks associated with different asset classes, they can then begin to identify which asset classes they should include in their portfolio. Different investors may have different risk tolerances and goals, which will ultimately determine which asset classes they choose to diversify into. Some common asset classes that are suitable for most portfolios include stocks, bonds, real estate and commodities.
When choosing which asset classes to invest in, it is important for investors to consider their risk tolerance and financial goals. For example, an investor with a high-risk tolerance may choose to invest heavily in stocks, while an investor with a lower-risk tolerance may opt for more conservative investments such as bonds or real estate. It is also important to consider the time horizon of an investor's investments. For example, investors who are looking for short-term returns may opt for more liquid investments such as stocks or bonds, while investors with a longer-term outlook may choose to invest in less liquid assets such as real estate or commodities.
By taking the time to understand portfolio diversification and the different types of risk associated with investments, investors can create well-rounded portfolios that are best suited to their individual needs and goals. By diversifying across different asset classes and within each asset class, investors can minimise their risk exposure while still taking advantage of potential returns in the market.
Tips for Building a Diversified Portfolio
When constructing a diversified portfolio, it is important for investors to remember the following tips:
- Make sure to diversify across different asset classes and within each asset class.
- Invest in assets that match your risk tolerance and financial goals.
- Consider the time horizon of your investments when choosing which asset classes to invest in.
- Stay informed on market dynamics and economic trends so that you can make informed decisions.
- Rebalance your portfolio periodically to keep it in line with your goals and risk tolerance.
- Keep an eye on fees and taxes when investing, as these can have a significant impact on returns.
Analysing the Correlation Between Different Investments to Calculate Diversification Level
Technically, investors should consider analysing the correlation between different investments in order to quantify the level of diversification that their portfolio contains. This is measured using something called the correlation coefficient, which is a numerical measure of how closely two variables move in relation to each other. A higher correlation coefficient indicates that two variables are more likely to move in tandem, while a lower correlation coefficient indicates that they are less likely to move together. By analysing the correlation coefficients between different investments, investors can get a better understanding of how diversified their portfolios are and make adjustments accordingly.
The minimum amount of assets you'll need to be able to do this is two. Beyond that, each subsequent asset you measure will need its own correlation with each of the previous ones, giving you what's called a covariance matrix.
However, do note that it simply isn't practical for the common investor to perform statistical analysis on investments before making any decision, so it's generally acceptable to use common sense and pre-defined asset allocation buckets in order to make sure their portfolio is adequately diversified.
Practical Tips for Implementing Portfolio Diversification
Finally, investors should remember to practice good portfolio management when implementing diversification strategies. This includes regularly monitoring their investments and rebalancing their portfolios if necessary. Additionally, investors should consider employing risk management techniques such as stop losses and hedging in order to minimise potential losses from market downturns. By taking the time to understand the fundamentals of diversification and implementing good portfolio management techniques, investors can ensure that they are taking advantage of the potential upside while minimising their risk exposure.
By following these tips, investors can create a diversified portfolio that is tailored to their individual needs and goals in order to maximise returns while managing risk. With smart investing and careful planning, investors will be in a better position to take advantage of opportunities in the market while still reducing their risk exposure. Additionally, they can improve their understanding of financial markets by continuing to educate themselves on investment strategies and trends. With time and dedication, investors can achieve the level of portfolio diversification that best suits their needs and goals.
The Strabo Diversification Score
In order to make it more simple for users on the Strabo platform, we implemented a simple diversification score which measures how diversely your portfolio is spread, and gives you some basic insights into how you might rebalance in order to get closer to your safe allocation.
A diversified portfolio can provide investors with higher returns and lower risk levels than a concentrated portfolio. To better evaluate the effectiveness of an investor’s portfolio diversification strategy, they can use the Strabo Diversification Score (SDS). The SDS is a measure of how diverse an investor’s portfolio is based on their asset allocation across different asset classes and within each asset class. An SDS score of 100 indicates a perfectly diversified portfolio, while an SDS score below 50 indicates that the investor has too much concentration in certain asset classes.
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The asset correlation above is then weighted by the % allocation you have in your portfolio to give a weighted standard deviation. This is divided by the portfolio risk (which represents expected performance), to give a diversification ratio, which is then scaled up to a score between 0 and 100. This process uses daily performance data from the last 5 years for each of the asset classes concerned.
The SDS can help investors to determine where they need to make adjustments in order to achieve the optimal level of diversification. It also provides investors with insights into the correlations between their investments, so that they can make informed decisions about where to allocate capital. By determining an appropriate level of diversification, investors can minimise their risk exposure while still taking advantage of potential returns in the market.
Evaluating the Results of an Effective Portfolio Diversification Strategy
Once an investor has implemented a diversification strategy, they should regularly monitor their portfolio performance and adjust their investments accordingly. Evaluating the results of an effective portfolio diversification strategy can help investors to understand how well their strategies are working and whether further optimisation is needed.
For example, investors should compare the returns on their diversified portfolio to that of a more concentrated portfolio in order to assess how much diversification has contributed. Investors should also analyse the correlations between their investments to identify any areas of concentration that need to be addressed. Finally, investors should use risk metrics such as Value at Risk (VaR) and Maximum Drawdown (MDD) to measure risk levels in their portfolios and see if they are within an acceptable range.
By regularly monitoring their portfolio performance and adjusting their investments accordingly, investors can ensure that their strategies are working as planned and that they remain diversified while still taking advantage of potential market opportunities. With the right combination of strategy and discipline, investors can maximise returns while minimising risk through diversification.
Why Use Investing Apps in the UK
Investing is now simpler than ever thanks to these applications, which get rid of the need for pricy brokers or complicated procedures. Investing apps like Trading 212, Freetrade, and Revolut make it possible for young and beginner investors to take control of their investments with their user friendly interfaces, built in educational tools and minimal or no costs.
As the need for low cost investing options and financial independence continues to grow, the UK is expected to utilise mobile investing tools even more in 2025. More people in the UK are using apps to manage their money as a result of its adaptability, simplicity of use, and the growing trend towards digital financial solutions and increased awareness of personal financial planning, which makes investing apps an effective tool for beginner investors.
Benefits of Using Investing Apps for Beginners
- Accessibility - By providing a straightforward, mobile friendly platform that is available at anytime and from any location, investing apps have completely changed how individuals invest. You no longer have to spend hours learning complicated systems or setting up sessions with financial experts. Beginners can begin investing directly from their smartphones with a few taps. Anyone, regardless of their schedule or location, can participate in investing without any obstacles thanks to this immediate access.
- Low cost - The affordability of investment apps is one of their most notable benefits. The high commissions and administration costs associated with traditional broking services make it challenging for those starting out to invest small amounts of money. On the other hand, a lot of investment apps provide cheap fees or commission free trading, which makes them perfect for beginners. This enables beginners to invest without fear of losing a significant amount of their profits to fees, allowing them to give more money to the market.
- Adaptability - Traditional investment strategies are not as flexible as investing apps. Beginners can more easily dabble without making a significant upfront payment because many investment platforms enable users to invest in a variety of assets, stocks and shares, exchange traded funds (ETFs), and specialised investment options, allowing beginners in the UK to diversify their investment portfolios right away. Furthermore, everyday investors may manage their investments on their own terms and are not restricted to a 9 to 5 schedule thanks to the option to trade at any time and from any location.
Manage your wealth like never before

Key Features to Look for in an Investment App for Beginners in the UK
- East to use interface
The design of the app should be simple and intuitive. You will find it easier to comprehend and utilise the platform without feeling overwhelmed if it has a straightforward and uncomplicated layout. - Educational Resources
The best investment apps include educational materials such as FAQs, videos, tutorials, and articles. Beginner investors can use as a guide to understand important investment strategies and make wise choices. - Platform fees
A lot of investment apps charge management fees and trading fees. To protect your investment gains, it's crucial for beginners to select an investment app with little to no costs. The best investment apps waive management fees or provide zero commission trading. - Low minimum investment
For beginners who might not have a large initial investment, apps that let you start investing with small amounts of money are excellent. Also look for apps that sell fractional shares, so you can invest in pricey stocks without having to purchase the entire share. - Portfolio diversification tools
Seek for investment apps that provide a variety of investment options, including mutual funds, index funds, and exchange traded funds (ETFs). Even with little money you can create a diversified portfolio by making a fractional investment in individual stocks. - Robo-Advisor Features
Some investment apps include robo-advisors which automatically manage your investment portfolio according to your goals and risk tolerance. For those whose may not feel comfortable choosing their own investments, this is a fantastic benefit. - Security features
It is important to ensure that the app has strong security features like encryption, two-factor authentication, and safe account recovery methods to protect personal data and information. - Current market data
The best investment apps have real time market data, charts and stock market performance metrics which are essential for beginners who wish to remain informed and make wise judgements. - Type of investment accounts
There are many types of investment accounts available, such as investment accounts for minors, individual retirement accounts and individual taxable accounts. You should choose an investment app that provides you with a range of account options that can help meet your financial objectives.
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