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