Investing is something you should do with all the tact and skills you have. And when you are investing, one of most important Foreign Exchange Markets thing you should do is to diversify.
Diversification, it goes without saying, is among the highest priorities of a good investor. Without proper diversification, you will definitely have a hard time trying to veer off from and control risks.
By picking the right kinds of assets, you can effectively minimize and mitigate the risks that you have to suffer. You may even manage to reduce the overall volatility that your portfolio can experience.
Here are some of the most useful Currency Pairs tips for diversification that will surely make your portfolio a lot better than before.
Determine Your Risk Tolerance
When we say risk tolerance, we refer to the amount of risks that you are willing to withstand in exchange for the rewards that you can get. In general, higher risk tolerance means you can endure more risks if it gives you the chance to get a much, much higher reward.
Knowing your risk tolerance is very important because being faced with higher risks than you can tolerate may lead you to being irrational when deciding about a trade. When you’re too anxious about a trade or too doubtful about the benefits you may get from it, you will feel too scared to enter even a very ideal trade.
Set a Goal when Allocating Assets
Aside from your risk tolerance, you should also be clear about the goals you want to achieve. Once you know the specific things you want to achieve in the short and long term, you will then have a better view of what’s ahead and how you will maneuver to go through.
Most of the time, those with high risk tolerance will gravitate towards assets that have higher risk-return profile.
Such asset classes include small-cap, deep value and emerging markets stocks, high yield bonds, REITs, commodities and various hedge funds, and private equities strategies. For those who don’t have much risk tolerance, putting safer investments like government and corporate bonds, dividends, and low volatility stocks may be a better idea.
Minimize Your Concentrated Positions
If one of your securities in your portfolio represents around 5 percent of your entire portfolio, it means that you have a concentrated position. In many cases, individuals and families get these positions through employer 401(k) plan matching, stock awards, stock options, inheritance, gifts, or even simply personal investing.
When you have a concentrated position, you are in risk of dragging your position down significantly in the event that the security has a bad year or the company has acquired a broken business model. That means you can lose a huge portion of your investments and retirement savings.
And that is what we try to avoid when we try to diversify our portfolio. The more we concentrate on one asset, the higher the chance that we will lose everything in our portfolio. In order to minimize the chances of your portfolio being dragged down by only one security, you have to diversify.