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Okay, so Arthur, in this video, is going to show you how you can divide your investments to maximize profit and minimize risk. Look at how people usually do this in practice. I don't know if you're familiar with the concept of a network; I explained it in another video. Actually, everything I'm talking about here is explained in more detail in previous videos.
If you don't know something, go and take a look so you don't have to stop every time this video can explain it. Okay, so basically, it's like this: when you buy assets and one cancels out another, and in this case, I'm going to show you how I did this by buying BOVA11, which is the Ibovespa, the replication of the Ibovespa.
BOVA11, the ETF, is a basket of stocks that replicate the Ibovespa. If you don't know what the Ibovespa is, go back to the previous video where we explain in more detail what this means in practice. We have 1,200 reais to divide equally among each asset here for experimental purposes. Okay, so since we have 1,200 reais and put 600 reais in [unclear - possibly a stock market index], we'll show you how I did it.
On November 11th, the Ibovespa (Brazilian stock market index) rose 10%, meaning you earned 60 reais that year. However, you only invested in the Ibovespa; you also invested in dollars. In a previous video, I already mentioned that the dollar and the Ibovespa are perfectly or negatively related, almost perfectly.
In practice, this means that when one goes up, the other goes down. In another video, I explained why this happens. If you want to understand better, go there. Okay, in practice, where did this happen? Investing in a new Ibovespa rose 10% that year, I reached 60 reais. But you also invested 1 dollar, meaning you invested 600 reais in dollars.
However, the dollar fell 10%, which means in practice you lost 60 reais. If you add what you gained (11) and subtract what you lost in dollars, it will equal zero. So in this case, you lost your position, which means you did n't even gain anything. The method used to do this kind of thing is also used to make money, but I won't explain that here.
Okay, I'll explain now what diversification is. Diversification is what... Most people do it, and everyone thinks that diversification is about protecting themselves from risks. In practice, the risk is practically zero because the chances of one asset falling under another are very high, so it's very difficult to lose anything.
Losing something is usually zero when the negative correlation is perfect. There are other cases that are very risky, but I won't discuss them here. This is just to show you how diversification works and what it means. Diversification, that old saying that many people criticize—don't put all your eggs in one basket— means that you invest in different assets, whether they are government bonds, stocks, real estate funds, or even stocks from different business sectors— different companies—to diversify because this reduces risk.
In practice, it reduces risk. This means that if some of those assets go up and others go down, in the end, if you know what you 're doing, you will have made money, and I'll demonstrate this here in practice. Okay, so you have R$1,200 to divide here, in this case, into three different assets, which gives R$400 per asset.
Let's simulate what happened in this case: R$400 was invested in Cemig, which is a stock, and Cemig went up 10%. Percent means you earned 40 reais, then you invested another 400 reais in a government bond, and the government sector rose 15%, in this case that would be 60 reais. But since you were diversifying, you added more stocks, and for some reason you invested in Petrobras, and Petrobras fell 10%.
So why did you lose 40 reais in this case? Therefore, with 100 reais, you get at least 40 reais. In the end, you gained 60 reais. So diversification reduces your risks but also reduces your profit. Finally, he talked about concentration, the focus in investments. One of the world's greatest investors warns that you can only do this if you perfectly master what you are investing in, whether it's a business, a stock, a government bond, where you have control over the greatest number of variables possible.
So this concentration is a little difficult to do because, even if you control the asset you are investing in, you don't have control over the macroeconomic scenario, i.e., inflation, interest rates, crises, what happens in the world. So you will always have uncontrollable variables. So if you know...
Much of what you're doing might be worth doing. Concentration, which starts with concentration, makes us think, for example, that Warbucks had R$1,200 and put it all into a government bond because he knew how to work with government bonds, he knew that they would probably go up, according to his analysis.
So, putting R$ 1,200 into a government bond and it went up 15%, in practice that means he gained R$180. And since he didn't invest in other assets, in this case, this is a pure demonstration of concentration and not investing in other assets, he didn't lose anything because in this case it only went up, so he freed up R$180.
In this case, he charged more, the return was zero. The diversification, which was R$60, or the concentration, which was R$180, obviously was the concentration. But concentration presents a greater risk. Imagine if that bond falls, he would lose all the money in the same way he gained. I suggest there's another technique I teach called asset allocation, which allows us to greatly reduce risk and maximize returns.
This allows you to diversify correctly, to have your money safer and make it yield more. I won't discuss that in this video. But I need you to know that this requires, okay, I just need you to understand the concept of network diversification and concentration. Concentration is that story the IMF says about putting all your eggs in one basket and watching the sixth one very closely.
The opposite of diversification is putting your eggs in many different baskets, preferably far from each other, so that if one breaks, the others are safe. So, if you understand these three types of resource allocation, you will be able to understand better when I talk about asset allocation and how it works.
Thanks for being here with me, and if you think this content is useful to someone, share it; that person will really like it. And if you can give a thumbs up to confirm that I'm on the right track, that thumbs up is what sponsors the videos on this channel. Okay, a big hug and see you in the next video.
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