So far in this series, we’ve talked about the benefits of portfolio diversification, what it is, market randomness and trying to protect against black swans.
Today we touch on another way to diversify your trading portfolio. This is to diversify across asset classes.
An asset class is a group of assets that have similar characteristics.
Examples of common assets classes are stocks and forex.
Examples of assets that make up these asset classes are Apple & Tesla (stocks), EURUSD and USDCAD (forex).
Potential benefits of portfolio diversification across different asset classes.
Each asset class will exhibit different behaviour, some of the time. By diversifying our portfolio across multiple asset classes, we can expect some assets to be going up, as others are coming down.
This can have a great benefit to the overall performance of the portfolio. If there is a crash in the stock market, you wouldn’t expect AUDJPY to fall off a cliff.
Similarly, if GBPCHF goes haywire, you wouldn’t expect it to negatively impact the S&P500.
Portfolio Diversification can help smooth out periods of drawdown and increase the risk-return ratio when using uncorrelated asset classes like in the examples above.
See how diversification benefits your portfolio on the Darwinex platform.
Darwinex provides a host of different metrics you can use to analyze various aspects of your portfolio.
For instance, under the assets and timeframes tab, it displays the percentage share each traded asset makes up of the portfolio.
These metrics can give valuable insight into the robustness of your portfolio.
Throughout this series, we have covered various insights into different ways of implementing diversification strategies into your trading strategy, both at a trade level and a portfolio level.
Diversifying across asset classes can be another great tool to utilize.
Yes, portfolio diversification is a tool. It’s a handy tool, but a tool nevertheless.
It’s up to the trader to decide if, when and where to use it.
When deciding upon which tools to use in your trading portfolio, always backtest to see what benefit it may provide.
Feel free to share some backtest comparisons of your undiversified and diversified returns on social with #darwinexchange.
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Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.