Learn to Diversify Your Strategies not Your Assets

Learn to Diversify Your Strategies not Your Assets 5.00 / 5 (100.00%) 1 vote

When most traders think of diversification, they will look into different markets and styles of investments in relation to their assets. This means that traders will need to supplement their portfolios with several different outlets profit, which can help reduce the risk of significant losses by spreading out investments over asset classes. Asset classes are defined in specific categories that relate to different financial instruments, which can include stocks, cash, or bonds. These different instruments define different types of diversifications that people can make in their portfolios, which can allow them to hedge against risk in favor of long term profits. However, what many people are not aware of is the fact that if you diversify your strategies not your assets, you will be able to hedge against risk effectively as well. Even if you allocate your time and energy between two types of assets instead of a broader spectrum, you will still be able to profit in just about all market situations with the right strategies in mind.

When you limit your opportunities to specific asset classes, you are also limited yourself in terms of various trading strategies that, because of the way they function, can provide you with more diversification in the long term at an increased level of comfort. Just about all asset classes, no matter their nature, are dependent on similar drivers or conditions in order to generate returns for the investor, What this means is that event risk, no matter the extent, can still be enough to have a negative impact on the portfolio. As such, diversification strategies over asset classes are not as foolproof against risk as some people may think.

As such, a level of true portfolio diversification can be properly achieved by diversifying your drivers and strategies in accordance to your asset class of choice. Getting started with strategy diversification involves looking into baselines for certain conditions as they pertain to different drivers. This means preparing to do the research in order to know your market better and analyze favorable conditions, reading between the lines in charts and graphs to identify when lucrative opportunities can present themselves. As such, trading strategies are defined by the system that can exploit the return driver, and the market works best with that specific driver.

When you diversify your strategies not your assets, you also begin to look at risk in a different light as well. Risk is defined as volatility in returns, and understanding how risk works in investments can help you make more financial sound decisions. When working with rational return drivers, however, you can expect to worry less about risk and enjoy trading in a more confident way. All drivers are affected by different degrees and types of risk, and by identifying how they work in different market patterns, you will be able to diversify your portfolio in an efficient way.