When it comes to trading, having an entire collection of the same tools that do the same thing in the same way puts you at a greater risk of being unbalanced when winning or losing. The risks presented are higher, and the results are nothing to write home about. A diversified portfolio is one that has a complementary mix of tools, instruments and trading strategies that operate differently from one other. Doing this will allow you to reduce the risk of your investment in the long term.
When putting together your portfolio over any time period, it is best to incorporate strategies that deal with both long position trades and scalping methods. Although you are more likely to make larger profits over the long-term position trade, scalping does prove profitable when the market is in turmoil or going through a quiet patch. Scalping requires frequent, short trades for regular, small profits. Many traders who are new to the market or who wish to get going without much learning or research choose to mirror or copy the successful trade strategies of others.
Statistics have revealed that a portfolio that is well-diversified presents lower related risks than that of a portfolio that is less diversified. If you use the example of stocks and bonds where stocks are the riskier of the two options, you can formulate several strategies or hypotheses. For the more conservative trader who requires a less risky portfolio, two-thirds of the capital will be spent purchasing bonds, with the balance used to trade on the stock market.
In the opposite scenario, a more aggressive trader who is willing to take bigger risks may use the capital in a different way by allocating two-thirds to stock market trading in equities and the balance on bonds. While the risks in this case are higher, the rewards are also greater. It is important to keep in mind that in each category, there are also sub-categories to choose from and each carries its own level of risk and return.
It is never a good idea to place all your eggs in one basket – don’t invest your entire capital according to one provider of signals. Building a winning, stable portfolio requires balance. It is important to remember that diversification is vital, but going overboard is not the answer. According to Warren Buffet, a portfolio that presents a vast and wide range only shows that the trader doesn’t quite know what they are doing.
Weigh your options
Before undertaking any particular strategy or acquiring any specific equity in the market, research, read, follow current events and seek advice from the professionals. Don’t risk your capital without giving the situation due consideration. While trading always involves a degree of risk, how you manage that risk is completely up to you. Don’t go after the large profits straight off the bat. Small, regular profits will see your balance rise. Once you have gained some experience and confidence in the trading arena, you can broaden your horizons. It is important to stick to your chosen strategies, so don’t doubt your research!
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