If there’s one thing that investors are constantly warned about, it’s the dangers posed by over exposure and putting all of their financial eggs into one basket.
However, while there are numerous benefits of expanding and diversifying your portfolio in the modern age, this is also a process that must be managed carefully and organically over an extended period of time.
In this post, we’ll ask why you should consider expanding and diversifying your investment portfolio, while explaining how this can be done successfully.
The Why – Spreading Your Capital Across an Array of Assets
Whether you primarily trade stocks or currencies, you’ll note that the value of each individual asset will fluctuate over time (albeit at different levels of volatility).
In the case of currency, for example, this means that buying into a single currency pair carries a significant risk of the asset depreciating against others in the market, with the margin-based nature of currency trading meaning that you could lose more than your initial deposit.
Of course, the derivative nature of currency trading also allows you to profit directly from movements by eschewing ownership of the underlying asset, but you still risk losing your capital if you fail to pre-empt trends or active stop losses on your account.
Minor or exotic pairs are particularly volatile, of course, so taking the decision to expand the selection of currencies in your portfolio minimises the fundamental risk and helps to maintain a positive balance over time.
The key is to diversify your interests in line with experience and profits, of course, and we’d recommend starting your forex trading journey by trading a couple of major currency pairs (particularly relatively safe and predictable assets such as the USD/JPY).
The How – Diversifying Your Currency Portfolio
From here, each subsequent currency pair is an opportunity for you to diversify your foreign exchange portfolio, but the question that remains is how do you expand your interests safely and effectively?
A basic rule of diversification is to seek out asset classes that have low or negative correlations. This has a counteractive effect to loss-making assets, and while it’s not immediately possible when trading alternate currency pairings, it’s important to opt for pairs that cover both major and exotic assets.
If you intend to include an exotic currency pair into your portfolio, we’d also recommend that you experiment with different options to identify the ideal combination (and ideally one that suits your trading strategy).
You can do this when using a forex demo account, which effectively simulates a real-time marketplace and enables you to hone your strategies without risking your hard-earned capital. You can use this type of account for up to six months when registering with a broker, and it’s during this time that you should try trading variable currency pairs.
With this type of approach, you can scale your investment efforts organically while also ensuring that you diversify in a safe and manageable way.