Diversification Is Investing That Yields Greater Safety
Everybody wants to invest money to earn higher returns
. At the same time, they want to avoid risk. Risk cannot be avoided, but it can be reduced through diversification.
Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The logic behind this financial technique contends that a portfolio of different kinds of investments on average will yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments neutralizes the negative performance of others within a portfolio. The benefits of diversification only occur if the securities in the portfolio are different investments at all times.
The procedure each investor decides to diversify is through a process called asset allocation. Investors are constantly told to diversify their portfolios.
Your financial advisor tells you to own investments that are broken up and allocating them into different sections. When you do this you can easily diversify your portfolio.
The four courses are cash, bonds or fixed income, stocks or equities, and real estate, and other basic investments. Other basic investments would include foreign investments, oil and other natural resources, and precious metals like gold and silver to add even more diversification.
The percentages we have in each of these categories describe the investment portfolio as a whole. The whole picture of your diversification is important because it determines how much your investments are likely to grow over time and the amount of risk you are taking to achieve those returns.
It is vital to select investments that do not move in parallel with one another. This is because financial vehicles with similar risk characteristics tend to move together.
All these assets have become highly correlated with the suffering economy. Real estate is down, stocks are low, and many bond holders are learning firsthand what the word default means. Your diversified portfolio is not as diversified as it once was.
What can you do to help your portfolio to become more diversified? You can start to invest in managed futures.
Managed futures are generally considered to be investments that are watched over by a commodity trading advisor, also known as a CTA. A CTA is a person or entity registered with the Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association (NFA).
A CTA helps and advises you when it comes to your managed future. They will help invest in the futures and options markets in the account holder's or investors name.
A CTA is not allowed to accept trading funds in his own name or his company's name. This is done as a safety measure. So, all traded funds must be in the investor's name.
Historically, managed futures products have shown little correlation to traditional equity investments. Little correlation is good in markets such as the ones we are experiencing now. In fact, it is one of the best ways to achieve diversification.
The options available to investors are growing and changing at a rapid pace. Managed futures may not be for everyone as they are generally considered to be significantly more risky.
However, managed futures are a great option if you are a high net worth individual or a person who has a greater risk tolerance for an investment in a managed futures product or a portfolio. One thing all investors should be aware of is the risk associated with trading commodities.
There is risk of loss and your own financial condition should be taken into consideration prior to investing with any CTA. Also, it is important to remember that past performance is not indicative of future returns.
Investors should examine a manager's disclosure document carefully before making any investment decisions. If you are comfortable with the risk and are a sophisticated investor a small allocation to managed futures products may be a good fit for your portfolio.
One of the key ingredients to the success of diversification is time. Not all investments will flourish overnight. You may have to wait for them to really earn you money.
When you look at the long-term potential of your diversified portfolio, you'll realize that all is not lost when there is a dip in the market. The market will inevitably recover and you can reap the benefits if you refrain from panicking during the turbulent times.
by: Jack Landry
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