While researching trading and investing, you’ve undoubtedly come across the term Diversification. Maybe you were already familiar with the concept, or maybe it confused you like all the other industry jargon. Regardless, portfolio diversification is an important part of any investing strategy. As such, it’s crucial to understand what it is and how you can implement it in your own portfolio.
At CWS Capital, we offer a currency investing service in Alberta that comes in the form of a forex investment fund. As such, we can help you get more out of your portfolio. But of course, this all begins with education. So let’s begin by gaining a clear understanding of…
In its simplest form, diversification in investing is an investment strategy used to minimize risk. This is accomplished by allotting different investments to numerous monetary industries, sectors, and classifications. Consequently, this reduces the chance of loss by being more spread out across multiple asset classes. You’re essentially avoiding the old adage of “Putting all your eggs in one basket.”
And while diversification doesn’t make you completely immune to loss, it certainly helps mitigate its possibility. As a result, it’s one of the most crucial techniques you can employ as a long-range strategy in your portfolio.
What Is an Example of a Diversified Investment?
A well-diversified portfolio is one with a myriad of assets. For example, a portfolio consisting of bonds, shares, fixed deposits, etc, will be much more resilient and robust should any one of the assets take a hit in value. This is due to its varied asset allocation. So if a single asset suffers a loss in value, the portfolio – as a whole – will remain relatively stable in regard to its worth because of the other assets within it.
Compare this to a portfolio that’s only invested in single stocks of a particular company, for instance. If that company goes under – for whatever reason – your portfolio has essentially lost all its value.
Diversification is a strategy used to protect your investments by reducing this kind of risk.
That’s where a forex investment fund can offer a lot of utility. Forex investment funds are designated to currencies: The dollar, the euro, etc. As a result of being spread over such a wide range of international currencies, a forex investment fund can offer great diversification, which can help quell your concerns in fluctuating markets and protect the value of your portfolio.
The Various Risks Involved
As an investor, there are two primary risks you must face: The first being that of market risk. This kind of risk comes with every company. Some of the causes are rates of inflation, exchange rates, unstable political climate, war, etc. This risk classification is not designated to any particular company, industry, or country. Moreover, diversification cannot eliminate or reduce it. It is a risk all investors must be aware of and accept.
The second risk is a diversifiable risk (otherwise known as unsystematic risk). This risk is designated to a company, sector, market, industry, or even a country. The most prevalent sources of unsystematic risks are financial risk and business risk. Due to the fact that it’s diversifiable, investors are able to minimize exposure via diversification.
What Happens When You Diversify Your Investments?
In short, you reduce your risk of loss. The act of spreading your investments over multiple assets helps to safeguard your overall portfolio. As a result, you’ll be less likely to experience a major hit to your investments in times of market volatility than if all you had was a single holding.
The Bottom Line
Diversification is an investing strategy that has become the calling card for investors the world over. It helps protect your portfolio assets by spreading them across numerous companies, industries, and other investing mediums. For this reason, diversification is incredibly important to your portfolio and its performance.
For nearly a decade, we here at CMS Capital have helped clients make the most out of their portfolios through a forex investment fund. As such, if you’re interested in getting more out of your portfolio and safeguarding your investments, contact us today to see if you qualify for our currency investing service.