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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.

Benefits of Portfolio Diversification

Benefits of Portfolio Diversification | Using Multiple Asset Classes

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.

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.