*OspreyFX would like to state that traders should research extensively before following any information given hereby. Please read our Risk Disclosure for more information.
Strike a Balance: Building a Great Portfolio
- What is a balanced and diversified investment portfolio?
- The importance of having a balanced trading portfolio.
- What should a great portfolio look like?
What Is a Balanced and Diversified Portfolio?
A diversified portfolio is one of the fundamental aspects that every trader must consider before engaging with the markets. It is also a known fact that a risk management strategy typically combines multiple assets so as to reduce the overall risk of an investment portfolio.
Many investors may then think that if diversification is effective, then the more the better. However, it is important to remind all traders that over diversification can end up in harming their trades.
This article highlights the importance of a diversified portfolio and what it should look like.
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Why Is It Important?
As it was stated above, the main reason that leads traders to diversify their investment portfolios is risk minimization. In addition, diversification presents many opportunities for traders across all different markets.
First, a diversified portfolio will reduce the level of volatility of a portfolio because not all asset categories or industries act uniformly. If an investor holds a variety of assets that are non-correlated, it can eliminate almost completely all specific or unsystematic risks. As different assets rise and fall at different times, the volatility of the portfolio will decrease and so create chances for profitability.
Second, diversifying non-correlated assets preserves capital to invest on bull markets, as it reduces the risks on bear markets. Risks are part of the trading industry and can’t disappear completely. However, a well-diversified portfolio will ensure a risk reduction and create the balance between risk and return. As a result, this helps traders to move a step closer to achieving their financial goals.
What Should Diversified Portfolio Include?
As explained, every trader should not only consider investing in different assets but also in different industries. The more uncorrelated the assets are, the better. Moreover, uncorrelated assets will safeguard the portfolio from certain market swings. For example, bond and equity markets generally move in opposite directions. If a trader diversifies a portfolio across both areas, then negative movements on one side will result in positive movements on the other.
Every trader that wants to build a balanced and diversified portfolio should always follow a specific set of rules:
- Spread your capital – move around different industries and don’t invest all your money in one single asset.
- Consider index or bond funds – investing in securities that track various indexes make good long-term diversification investments.
- Keep building the portfolio and add to your investments on a consistent basis.
- Know when to get out.
- Always keep an eye on commissions – understand what you are getting for the fees you are paying.
Investing is an experience and an opportunity. Investors acquire financial knowledge when engaging with the markets and can build a career by doing it. However, it is important for all traders and investors to consider the tools and strategies that will help them to create a smooth process. Always keep your portfolio well-diversified and reduce the risks of losing money.