We are all aware of the increased prevalence of online trading. While some so-called “experts” in the past believed that this sector was nothing more than a digital whim, the sheer size of the virtual community now dictates that individuals from all walks of life are appreciating its associated benefits. This observation is backed up by some staggering statistics. A recent study suggested that there are currently more than 9.8 million online traders and this figure is only increasing. Still, not all will succeed. One of the most important strategies involves the concept of diversification. What are the associated benefits and why should you consider taking such an action sooner as opposed to later?
Stabilising a Ship on a Turbulent Sea
The markets are not always associated with favourable conditions and as the expression goes, nothing moves forward in a straight line. Investing in only one or two holdings is akin to sailing a ship with no rudder or oars. The winds of change could soon cause this vessel to founder upon rocky shores. In terms of investing, such volatility can quickly result in substantial losses.
A diversified portfolio is one which is able to ride the waves until it encounters a safe harbour. As it contains a number of disparate underlying assets, losses incurred within a single sector can often be mitigated or even outweighed by gains in another.
Levels of Comfort
There is a lesser-known benefit associated with diversification that is worth exploring. Some asset classes are rather new and unfamiliar to traders. One example is the liquid nature associated with cryptocurrencies, but why trade cryptocurrencies? You can trade on margin which means that you are able to obtain more stock than would normally be feasible. Still, this can be a risky venture. A diversified portfolio is able to minimise these inherent risks.
Another interesting (and lesser-known) advantage of a diversified investment strategy is that traders can become involved with sectors that might otherwise make them feel too uncomfortable. In other words, they are not forced to commit 100 per cent of their savings towards a potentially tenuous position. This is the primary reason why even conservative traders will often take out small holdings in areas such as cryptocurrencies and Forex pairs.
The third primary windfall which can be attributed to a diversified investment strategy is that this methodology is associated with steady returns over time. This is even more relevant when dealing with major economic and political events such as the Brexit movement. A well-balanced portfolio will continue to provide returns; key in terms of ROI. While the exact breakdown of such holdings will vary from trader to trader, some underlying assets which are normally present include:
- Blue-chip stocks
- Forex and CFD positions
- Spread bets and digital 100 trades.
Thus, both sides of the investment spectrum are covered when embracing such an approach. This helps to ensure steady performance even during times of economic uncertainty.
The principle of portfolio diversification is rather straightforward and it is a great habit to adopt from the very beginning. Not only are you provided with a greater level of flexibility, but unique trading preferences can be accommodated with ease.