General Questions · Basic level · 3 min read ·
What is diversification?
Diversification means spreading your contributions across several projects, asset types or places instead of putting them all in one. That way, if one project does badly, the effect on your total is smaller. It reduces concentration risk, but it doesn't remove risk: some factors hit everything at once.
In 30 seconds
- Diversifying means not relying on a single project for your results.
- It reduces the effect of one bad result on your total.
- It doesn't remove risk: a general crisis can hit every project.
Why should you care?
No project is free of surprises. Diversification decides how much each surprise weighs on your total.
- A problem in one project doesn't define your whole result.
- You combine businesses that depend on different things, like tourism and sunshine.
- You understand that spreading out is not the same as protecting.
Think of it as not putting all your eggs in one basket
If you carry all your eggs in one basket and it falls, they all break. Spread across several, a fall breaks only some. But if you slip holding every basket, they can all break anyway: that's why diversifying reduces risk rather than erasing it.
How does diversification work?
- 1
Spread across projects
Several smaller participations instead of one large one.
- 2
Spread across asset types
Businesses that depend on different things: hospitality depends on guest demand; solar energy on the sun and the grid.
- 3
Spread across places and times
Different cities, or joining projects at different moments.
- 4
Review the whole
Look at how much of your total depends on each project, not just how each one is doing.
The formula
Weight of a project = Contribution in that project ÷ Total contribution
- Contribution in that project
- = what you hold in one project
- Total contribution
- = the sum of all your participations
An example with numbers
Illustrative arithmetic, unrelated to any project: you hold 100 units and one of the projects does badly, so its value drops 20%.
| All in one project (100% weight) | 100 → 80 |
|---|---|
| Spread over 4 projects (25% weight each) | 25 → 20 in one; the other 3 stay at 75 |
| Spread total after the hit | 95 |
| Effect on the total | −20 concentrated vs. −5 spread |
The same bad result weighs four times less when that project is a quarter of your total. If all four fell at once, spreading out wouldn't help.
Where do you see it at Circular Urban?
Circular Urban has hospitality projects, such as short-stay apartments and coliving, and solar energy projects, with contributions from about 190,000 pesos. Your portfolio shows each participation separately. This is not a recommendation: each project has its own risks, and results are subject to its actual performance.
- Your portfolio, with the detail of each participation.
- Each project sheet, where you see its asset type and location.
- The risk declaration you sign before subscribing.
What changes in your finances once you get it
You check your weight per project
You work out how much of your contributions depends on each project before adding a new one.
You look for different sources
Combining businesses that don't depend on the same thing reduces the effect of a single hit.
You don't confuse quantity with safety
Holding many participations doesn't make any project safe; each one keeps its own risks.
Common mistakes
- Myth
If I diversify, I can't lose.
- In reality
Diversifying reduces concentration risk; it doesn't remove it. A general crisis can hit every project at once.
- Myth
Ten participations in nearly identical projects is good diversification.
- In reality
If they all depend on the same thing, like one type of business in one city, the risk is still concentrated.
- Myth
Diversifying always improves the result.
- In reality
What it does is smooth it: it softens the worst case, and it also dilutes the best one.
Test yourself
You split 200 units equally across 4 projects. One drops 10% and the others don't change. What is your total worth?
Keep learning
This content is educational. Every participation carries risks inherent to the project, including the possibility of partial or total loss, and results are subject to each project's actual performance.
