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What does Enough Portfolio Diversification look like?

How much is enough portfolio diversification? Reminds me of a song.

Cue Michael Jackson music. Don’t stop ’til you get enough. Was Michael talking about portfolio diversification when he wrote that song? As much as I’d love it to be true, I don’t think it can be.

So, what might a diversified portfolio look like?

Can we have too much portfolio diversification?

What does enough portfolio diversification really look like?

So many questions. Let’s break it down into each technique we’ve looked at so far.

Diversification across asset classes

We could look to trade Forex and stocks. By trading these two different asset classes we would expect that if there were a stock market decline it wouldn’t also lead to a decline in the FX market. We could take it a step further and trade commodities as well.

Diversification within the same asset class.

We could then break down each asset class and look to trade more than one asset within each asset class. Maybe a USD denominated FX pair and a JPY cross. We could trade stocks from different sectors or industries. Then we could trade a metal like copper and a soft commodity like coffee.

Remember though, due to the random nature of price action even two uncorrelated assets will exhibit similar behaviour some of the time. This means the max diversification benefit can only be achieved a maximum of 50% of the time when diversifying across 2 assets. This does increase with the more assets you trade.

Remember these assets need to be uncorrelated.

It’s also important at this point to look at how much the volume of trades has increased. In the above example, we have 2 FX trades, 2 stock trades and 2 commodity trades. Each of those will eat into our available margin.

Diversification across timeframes.

If one of the FX trades, trades the daily timeframe we could look to run a strategy on the 15min as well. Or we could trade one of the stocks, maybe a value stock, long-term and look to hold for a period of months. Then trade a tech stock short term, perhaps some form of intraday strategy.

Diversification across trading strategies.

We’ve already partially covered this in the above example. There may have been some overlap in using the same strategy in different asset classes.

But we could also look to harness different alphas within the same asset class. This could take the form of a momentum strategy and a mean reversion strategy within the same asset class.

The above is just a hypothetical to illustrate just how flexible diversification can be and the potential power it holds. But with great power comes great responsibility. Just because we have these tools at our disposal doesn’t mean we need to use them all.

It’s going to take a vast amount of time to backtest and implement the above. It’s also going to take a sizeable chunk of capital compared to just running two or three strategies. You’ll need to decide which applications are best suited to your portfolio.

To sum up

You can’t have too much diversification from a portfolio point of view. You can however have too little time and money to implement them all successfully. We need enough portfolio diversification that we get the benefit but not so much that it requires too much effort. To reiterate.

You’ll need to decide what’s best for you.

You need to find a balance between effort and value. Only you will know what that is as we all have different circumstances.

What’s your preferred method of diversification?

Tag us on Twitter (@Darwinexchange) with your thoughts.

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


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.

darwin-data

Portfolio Diversification | Using Multiple Trading Strategies to Diversify your Portfolio

In the last few videos, we’ve covered a range of ways to help diversify your portfolio.

Namely

  • Diversification between asset classes
  • Diversification within the same asset class
  • Diversification across timeframes

Today we want to look at Diversification across trading strategies.

But first, let’s take a step back and think about why we want diversification in our portfolio? As traders, we need to decide how best to get to the desired outcome.

We want to maximise our returns, but also minimise our risk. If we take zero risk, it’s fair to assume we can expect zero return. We need to decide what we’re willing to risk to get the returns we want.

By using some of the techniques above we can look to fine-tune our strategy to do just that. You may have noticed in the examples in the videos, that the returns of some of the individual strategies before diversification are higher than the diversified return.

We’re not looking to chase absolute returns. That’s not the point here. In all the examples the risk-return ratio has been higher on the diversified portfolio. We’re sacrificing a little return, for less risk.

I like to think of an old gambling saying I used to hear ‘you need to bet to win money, but you need money to bet.’ If you lose 50%, you must gain 100% to break even. By fine-tuning the risk-return ratio you are better equipped to speed up recovery in the event of a large drawdown.

As traders, we must decide if the trade-off, of lower returns but a higher risk-return ratio is more appealing to us than absolute returns.

Do you think that diversification is a good idea?

 

Can you diversify your portfolio too much?

Two things can mitigate some of our diversification strategies. Black Swan events and market randomness. That’s why it’s so important to diversify your portfolio properly, to fill in the gaps and reduce the effect of these.

The Darwinex platform has a tonne of trading metrics that both the trader and the investor can benefit from. Even just the description from the trader can provide some good information about the strategy.

You can even import your trading history from another broker and then use our trading metrics to analyse your strategy and compare it to some of our Darwin’s.

If you aren’t yet familiar with DARWIN assets, think of them like ETFs or Mid-Cap Stocks.

Just like an ETF could track the performance of the S&P500, a DARWIN is a financial asset that tracks the performance of a trader’s underlying trading strategy, in real-time.

Darwinex manages the risk of investments in DARWIN assets independently of providers, ensuring that they carry a monthly maximum target VaR (95%) of 6.5%.

Our FCA Regulated Asset Manager charges performance fees on investor profits (20%) on a high-water mark basis, paying 75% of them to Providers.

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


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.

Benefits of Portfolio Diversification

Portfolio Diversification | Same Asset Class

It is possible to gain Portfolio Diversification benefits from within one asset class. The whole purpose of Portfolio Diversification is to try and build a robust portfolio of trading strategies; that perform well in a host of different economic environments.

Whilst you need to be selective of the assets you chose, the portfolio diversification benefits are clear.

Diversification is a tool that we can use to strengthen our portfolio. Being able to diversify across different asset classes, and within the same asset class, allows us to take a multi-pronged approach.

Care must be taken.

Although it is possible to diversify within an asset class, care must be taken because some assets within the same asset class are less correlated than others. For instance, in the commodities asset class, Natural Gas isn’t correlated to Coffee.

In the video below, we’ll go over another example using three uncorrelated forex pairs. Because they’re uncorrelated it means they provide a diversification benefit despite being in the same asset class.

It is important to note, due to the random aspect of the financial markets, two uncorrelated assets can exhibit correlated behaviour some of the time.

In this last post on Portfolio Diversification, we touched on some of the metrics you can use on the Darwinex platform to see how diversified and robust your portfolio is.

We’ll go over one of the investible attributes to further illustrate how useful these can be. The OsCs investible attribute provides a what-if scenario metric. It looks at the quality of the traders’ entries and exits and simulates results based on different entry and exits.

Darwinex provides 12 investible attributes that allow the trader to review different aspects of their trading strategies performance.

Along with various other metrics, these provide a powerful suite of tools to analyse the effectiveness of your edge. Using these the trader can judge entry/exit performance, scalability of the underlying strategy and diversification benefit to name a few.

What do you think the most important trading metric is to a trader?

Tag us on Twitter (@Darwinexchange) with your thoughts.

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


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.

$SHW shares will be split 3-for-1

The Sherwin-Williams stock split is approaching. $SHW shares will be split 3-for-1. Each Sherwin-Williams shareholder will receive two additional common shares to be distributed after the close of trading on Wednesday, March 31st.

At Darwinex we will apply the stock split on Thursday, April 1st at market open.

In live accounts, we will adjust the open position to the split without the need to close and reopen trades. In MT5, hedged positions will be closed and the split will be applied to the resulting net position.

In demo accounts, we will close all positions and pending orders on Wednesday afternoon, and we will prevent traders from opening new positions until Thursday’s market open.

Trading of $SHW common shares will begin on a stock split-adjusted basis on Thursday, April 1st.

As always, at info@darwinex.com we’ll be happy to assist you!

Trade safe,

The Darwinex Team

portfolio diversification strategies

Portfolio Diversification | Across Timeframes

Portfolio Diversification concepts are one of the most flexible tools you can use to improve your trading strategy. So far, we have looked at the benefits across multiple asset classes and within the same asset class.

There is also another way to implement Portfolio diversification concepts into your trading.

Is it possible to follow the same principles of Portfolio Diversification concepts across timeframes?

Let us see.

There are multiple ways to successfully introduce diversification into your portfolio.  It will not be appropriate to implement them all.

This is because we need to understand how each one affects the risk-return ratio of your portfolio.  We do this in order to increase the robustness of the trading strategy.

A simple and effective way to see if diversifying across timeframes would benefit you, is to use your existing strategy and change the timeframe.  It could be something that simple; Sounds too good to be true, doesn’t it?

For example, if your existing strategy trades the H4 timeframe, run some backtests on the 15m and see what effect it has.

The power of algorithmic trading is, once your strategy is automated, it’s easy to backtest across multiple timeframes and assets.

Keep in mind, the higher frequency your algo trades, the more costs you will pay.  For example; if calculations are based on trading x1 per day, if you add a strategy that increases frequency to x3 per day, it will increase costs x3 too.

Investors on the Darwinex platform can use platform metrics to see if the Darwin they’re interested in,  trades multiple timeframes. Keep watching until the end to see how.

Algorithmic trading allows you to efficiently test multiple ideas across multiple assets, asset classes and timeframes. Finding a way that does not work gets you one step closer to finding a way that does.

How do you use algorithmic trading to improve your time efficiency?

Tag us on Twitter (@Darwinexchange)

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


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.

Trading on TRY pairs disabled until further notice

Due to the recent volatility in TRY currency pairs due to President Recep Tayyip Erdogan dismissing the country’s Central Bank Governor over the weekend, the overnight funding market of the Turkish Lira presents extremely thin liquidity which is resulting in extremely wide swaps.

Because of the uncertainty created by this event, we have taken the decision to disable the opening of new trades on USDTRY, EURTRY and GBPTRY until further notice (only allowing the closure of trades opened beforehand).

This extreme measure is to protect both our customers and ourselves.

For any questions, reach out to info@darwinex.com and we’ll be happy to help.

Trade safe

The Darwinex Team