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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.

portfolio diversification strategies

Portfolio Diversification Strategies | Practical Implications

How important is portfolio diversification?

When trading we will sometimes have to make sacrifices. There just aren’t enough hours in the day to do everything. We need to prioritize what we do effectively to gain the most benefit.

Depending on whether we are a discretionary trader or an algorithmic trader, will impact how you implement a portfolio diversification strategy.

Key considerations when implementing a Portfolio Diversification strategy

Time will always be a consideration. As discussed previously, diversification is an important component of risk management at the portfolio level, but it is not the ‘golden bullet’.

Portfolios need to be looked at holistically.

Where are our efforts best focused on at this time? It may be that your underlying trading strategy still needs work before you can benefit from implementing a diversification strategy.

Or it may be that your strategies are nice and robust, and you can now focus your time optimizing the portfolio risk side of things.

Ultimately, you’ll need to decide where your time is best served.

But how do I know what to do?

In the video, Martyn goes over some of his personal experiences with how he trades his portfolio of strategies. They don’t just provide you with great educational content, our presenters also trade the markets themselves. Where do they find the time!

Another consideration is how you trade.

Do you trade manually, or do you trade using automation?

If you’re a discretionary trader; your skill, and the number of monitors you have, may limit the number of assets you can manage at once. Again, your circumstances will dictate what works best for you.

A long-only, passive portfolio will need a different approach to diversification than that of a more active portfolio like the example in the video.

So, what can we take away from this?

We need time to implement what we know, and we need to know what to implement when we have the time.

Argh yes, the circle of life trading decisions.. 😌

Take a step back from your portfolio and look at it with a bird’s eye view. What is the most impactful thing you can do now that will help improve your trading?

Did you know we have a Slack group dedicated to trading?

Feel free to join here. We’d love to connect and talk shop.

If you’re new to portfolio diversification, consider reading this post to get some background on the topic.

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.