Can diversification give you a better chance to take advantage of your financial ideas?
When should a trader be regarded as successful? When he can achieve stable earnings over the course of his trading career. Can you increase your chances of gaining more? Finding the right plan and a good strategy can create such an environment to reduce risk and earn more, but there is no one and nothing to guarantee your success.
However, proper management of existing risk in a broader range of assets within a portfolio could be helpful. Diversification is a risk management strategy that combines a large variety of assets in a portfolio in order to mitigate the risk. A diversified portfolio may reduce the risk that a single asset may create for you. The general concept underlying this technique is that a diversified portfolio will generate higher long-term returns and reduce the risk of any individual asset or security.
Diversification strives to counteract the negative performance of certain assets by the positive performance of other assets. Moreover, in a diversified portfolio, it is important that assets are not tied or affected by the same market fluctuations. It is easier to distinguish the benefits of diversifying when portfolio assets react differently to market influences.
- Investing in more assets leads to further diversification benefits, albeit at a significantly lower rate
- Portfolios may be diversified from one asset class to another and within the same industry
eXcentral’s CFD Asset Classes:
Pros & cons of diversification
Some key benefits are portfolio risk mitigation, market volatility hedges, and higher long-term returns. Some key disadvantages are limited short-term profits and management is more time-consuming.
Traders who may use such a technique often diversify their trades across asset classes and determine the percentages in the portfolio to be allocated to each, acknowledging, of course, the risks of trading.