Do you want your money to work for you? It’s never been easier to invest in a broad range of global markets. It is made possible thanks to a rise in the number of accessible online trading platforms. But the Covid-19 pandemic also saw an uptick in people prepared to find fortune in forex, stocks, and cryptocurrencies. If you’re a novice trader, however, one thing you may not yet know is the importance of diversification in order to maximise your profit-making potential.
What do we mean by a ‘diversified’ portfolio?
In the simplest terms, diversification is about not putting all of your eggs in one basket. There are numerous markets available to you. And that means having numerous opportunities to get the returns you want to see. This could be a mixture of cryptocurrency and forex. Or maybe you’re trading the stock market and have interests in listed companies from different sectors?
CFDs and spread betting allows you to speculate on the performance of assets across all those markets that interest you. It is an effective and often popular way to add a variety of interests to your portfolio. But it isn’t just about grabbing options from various shelves and putting them into your basket. It pays to weigh up correlations between assets when building your portfolio.
What is so important about diversifying risk?
By this, it means you should look at asset classes that react in different ways depending on the market’s movement. This is because diversification protects you from the worst excesses when an asset class doesn’t move in the direction you either wanted or hoped for. After all, when you buy high and the price drops, you stand to make a loss on that original investment.
This is when a diversified portfolio can kick in and make its huge benefits known. If one of your investments goes south, you can mitigate that through the positive performance of another. In an ideal scenario, those assets will work with each other – and keep your overall prospects in the green. It can also reduce any sense of panic when faced with a particularly volatile market.
How to effectively diversify your investments
So, how can you effectively diversify your investments for a healthy balance between risk and return? Well, there are a few steps you can choose to take. The first is to make sure that your choices aren’t all of the same ilk. In the case of forex, safe havens are popular with traders in need of reliable, dependable assets that won’t capitulate under global economic pressure.
You can also explore how best to spread the total value of your investments around. Would an exchange-traded fund (ETF) be more beneficial than individual stocks? Are fixed-income assets an option for your portfolio? And it’s always worth looking for ongoing opportunities to build up a portfolio. With more diversity comes greater risk mitigation that can boost your returns.