Anyone that has been trading for a long time has heard that diversification is the only free lunch our there, referring to the economics principle that nothing good is free. The problem has been that if you went to the typical financial planner you were deworsified and not diversified. Dont worry because diversification is still very useful if done properly and really does help to increase returns and lower risks.
Most financial advisors will diversify your investments by splitting your money into a few buckets such as domestic stocks, foreign stocks, and then place some in domestic Treasury or investment grade corporate bonds. If all you have is a mix of stocks and bonds you are only diversified into two asset classes while you could be doing so much better.
Diversification done right will not only have you invested in several different asset classes but also in multiple strategies inside each asset class. Ask a global macro trader why they trade this way and they will tell you that being able to go into multiple asset classes is the only way to consistently generate positive returns regardless of what the stock market is doing.
Global macro investors diversify into several different asset classes. Some of the more common ones are domestic stocks, foreign stocks, Treasury bonds, investment grade corporate bonds, junk bonds, foreign government bonds, foreign corporate bonds, commodities, real estate, and currencies. Some people will go as far as to trade in art and other collectibles as they are uncorrelated to regular investments and therefore add benefit if you have expertise in that area.
Global macro traders would all agree that one of the most important goals of an investor is to look for the best risk to reward opportunities. This is in stark contrast to most financial planners who just say buy and hold stocks for the long run. Yes, it can work for the long run but sometimes the long run is 30 years before you even see a positive return. Most of us dont live forever so lets plan accordingly.
Of course as alluded to earlier we can diversify in more than one way. Cast your net wide and put money is several asset classes but you can also diversify by looking at different trading horizons. For instance if you can manage multiple strategies in the same asset class then do that, if you cant hire an outside manager that can. For instance you can put money with an uncorrelated commodity trading advisor and then put money with a long term trend following commodity trading advisor. By doing this you are catching short term and long term movements in commodities. You can do the same types of things with other asset classes.
By diversifying both wide and deep you will be able to capture alpha or returns in a more consistent manner. Will you make money every day, week, month, or even year? There are no guarantees but properly diversified you will almost always outperform stock market indexes, especially on a risk adjusted basis.
If you are like most people these days and are managing your own investments then you will likely want to learn how to build trading and forecasting models to help you spot more opportunities. The more streamlined your research is the better your results will be and the better your returns will be. - 22871
Most financial advisors will diversify your investments by splitting your money into a few buckets such as domestic stocks, foreign stocks, and then place some in domestic Treasury or investment grade corporate bonds. If all you have is a mix of stocks and bonds you are only diversified into two asset classes while you could be doing so much better.
Diversification done right will not only have you invested in several different asset classes but also in multiple strategies inside each asset class. Ask a global macro trader why they trade this way and they will tell you that being able to go into multiple asset classes is the only way to consistently generate positive returns regardless of what the stock market is doing.
Global macro investors diversify into several different asset classes. Some of the more common ones are domestic stocks, foreign stocks, Treasury bonds, investment grade corporate bonds, junk bonds, foreign government bonds, foreign corporate bonds, commodities, real estate, and currencies. Some people will go as far as to trade in art and other collectibles as they are uncorrelated to regular investments and therefore add benefit if you have expertise in that area.
Global macro traders would all agree that one of the most important goals of an investor is to look for the best risk to reward opportunities. This is in stark contrast to most financial planners who just say buy and hold stocks for the long run. Yes, it can work for the long run but sometimes the long run is 30 years before you even see a positive return. Most of us dont live forever so lets plan accordingly.
Of course as alluded to earlier we can diversify in more than one way. Cast your net wide and put money is several asset classes but you can also diversify by looking at different trading horizons. For instance if you can manage multiple strategies in the same asset class then do that, if you cant hire an outside manager that can. For instance you can put money with an uncorrelated commodity trading advisor and then put money with a long term trend following commodity trading advisor. By doing this you are catching short term and long term movements in commodities. You can do the same types of things with other asset classes.
By diversifying both wide and deep you will be able to capture alpha or returns in a more consistent manner. Will you make money every day, week, month, or even year? There are no guarantees but properly diversified you will almost always outperform stock market indexes, especially on a risk adjusted basis.
If you are like most people these days and are managing your own investments then you will likely want to learn how to build trading and forecasting models to help you spot more opportunities. The more streamlined your research is the better your results will be and the better your returns will be. - 22871
About the Author:
The Macro Trader helps investors find great Global Macro Trader opportunities. Volatility Trading is but one of the many strategies that we use to help find the best risk to reward opportunities across the globe.
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