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The Importance of Diversification in Trading

The world is chock-full of trading advice, whether you consider the endless reams of online content or the annals held within libraries and educational facilities across the globe.

While advice often varies from one market or asset class to another, however, there are some universal rules that underpin all forms of trading. Take the importance of diversification, for example, which is advice given by all professional investors to individuals as they look to scale their portfolios.

We’ll explore this further below, while asking how you can successfully diversify as a way of minisming and hedging risk.

Why is Diversification so Important?

The term ‘diversification’ refers to the process of spreading and distributing risk across different types of investment, by holding a broad range of assets that will react differently to market or wider economic events.

For example, stocks tend to outperform bonds in growth economies, while currencies also increase in value in relation to rising base interest rates and a fundamental lack of economic stimulus measures.

Conversely, gold tends to gain in value during times of economic tumult, as investors seek out more secure stores of tangible wealth to offset derivative and margin-based positions.

So, by holding a combination of stocks, bonds and gold, you can diversify your interests and minimise the risk of your portfolio being hamstrung by single market events.

This is the main selling point of diversification, but this offers additional benefits to investors too. For example, a diversified portfolio with variable interests exposes you to far opportunities for return, taking into account both the versatility of your holdings and the total amount invested in each space.

Diversification also has the similar impact of minimising volatility, which is a desired outcome if you’re a risk-averse trader or focusing on accessing long-term gains by holding onto specific assets.

How to Manage Your Account as you Scale and Diversify

You can diversify your interests easily using the MT4 platform, using a single interface to access assets such as currencies, stocks and commodities.

However, there are a couple of things to keep in mind during the process of diversifying. Firstly, you should note that it’s possible to take on too many investments during this process, with any more than 30 likely to create a complex investment portfolio that’s increasingly difficult to manage over time.

Instead, as few as 20 assets can provide adequate diversification depending on your chosen markets, while enabling you to manage your portfolio effectively in real-time.

It’s also important to diversify and scale your investment portfolio organically over time, ideally in line with profitability and growing experience levels.

This enables you to scale in a manageable way, without encouraging you to take on a large number of investments and open positions before you’re ready to take on such a portfolio.

 

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