For proper risk and returns management, investors should not focus on one line of asset investment. Having various types of assets as options of investment is vital to succeed in your forex trading. If you have been relying on one asset, it is high time you tried other assets and you will reduce the impact of any arising loss or cover. However, it is not as easy as you might think. You will need to do a thorough research and invest in learning to come up with a forex portfolio that suits your investment needs.

Before we delve into the various aspects of this subject, it is important to explain what a diverse portfolio means.

Portfolio diversification means creating several trading positions on various asset classes. Its core aim is to limit or reduce exposure to a single class of risk. Diversification brings balance between trading risks and profit maximisation within a long period of time. It is important to understand that the assets do not correlate with each other. A common forex portfolio diversification is the one in which a trader use a huge number of currency pairs because there are high chances to beat the reference benchmark. However, it is important to note that risky pairs can be better for portfolio balancing for long-term investments.

We have broken this article into 3 sections for easy understanding.

What types of Asset Classes can be used for portfolio diversification?

What are the Advantages of Diversification?

What does a Diversified Portfolio look like?

Forex portfolio diversification ensures smooth trading sessions with minimal exposure. This is simply because even if one line of asset dips, another one within your diversified forex portfolio covers the dip or reduces the impact of the loss. Now, having said that, let us move to our first section.

What Types of Asset Classes can be used for Portfolio Diversification?

The forex market is one of the best market segments to do forex portfolio diversification. The reason is that, in this market, there are many opportunities to get high returns. In the other financial investments, the profit-making opportunities are limited. Remember, forex portfolio runs throughout the day therefore, as opposed to operar metales, or operar materias primas, forex trading has enormous room for diversification and more activities. You should note that the forex market is the most liquid market that even a fresher can jump and start trading immediately.

Whatever the market condition, you can short- or long-term trade and still make a profit. Emerging currencies also play a booster role for high yields, where risks can be minimised or absorbed. To sum it up, diversifying the forex portfolio could usher you to balanced trading where you can be sure of good returns. However, before the diversification, we must be sure of which forex asset classes to use and where to start. We will now share some currency pairs that will kick-start your forex portfolio diversification. We classify the forex assets as follows, exotic, minor, and major currency pairs.

Exotic Pairs: do you want to branch out? Well, exotic currency pair is the option readily available for you. However, before we go deeper into exotic pairs, let us have a grasp of what they are. Exotic pairs are pairs that comprise the US dollar (USD), and other emerging currencies. What are emerging currencies? These currencies come from the smaller economies on a global scale. To narrow it down, we can categorise any currency pair that emerges outside the Euro economy as an exotic currency pair. These pairs are less traded, therefore their trading costs could be inflated. Another aspect is that they are extremely volatile compared to the other two types. The net effect of this is that they carry high risks; however, they have higher reward opportunities once traded.

Minor pairs: these currency pairs do not have the US dollar in their trading pairs. This is a remarkable move in the forex portfolio enhancement because in the past, USD was considered the master measuring unit, and any pair without it was not thought of. Thanks to the change of dynamics in a forex trade, we can now have currency pairs devoid of USD. We have lots of emerging cross-currency or minor currency pairs that have made diversification of the forex portfolio simple and unique. The Japanese Yen (JPY), European Euro (EUR), and British sterling pound (GBP) are some of the most traded and active minor pairs. It is worth the trouble to monitor them.

Major pairs: the strongest and most prominent currency in the world today is the US dollar. It is therefore, a key element in every major currency pair. This means that in the major currency pairs, the USD could be either the quote or base currency. We can say that the USD is the currency monitor. In most instances, it dictates how the forex market moves. Another basic thing to note is that they are the most traded or active currency pairs in trading forex. They have the lowest spreads, however, the most liquid. If you are considering diversification in your forex portfolio, then the major pairs are the best because they carry lowerexposure. For the record, the most traded pair is the EUR/USD. The pair takes approximately 30% of the five trillion-forex trades done globally. Why is forex portfolio diversification so important? Well, we will share the benefits shortly.

What are the Advantages of Diversification?

It is normal for investors to be tempted to invest in one type of asset class because of its high return potential. We can equate the formula to a person who puts all eggs in a single basket. What happens if that person falls or knocks against something? Almost, all eggs will break, if not all. That is what can happen to a single asset class investment. If that asset collapses, then the investor loses all the capital. For example, if an investor invests in cryptocurrency, let us say bitcoin, chances are, when the price goes up, there will potentially be huge returns. However, when the reverse happens, the capital is dented. To counter this, portfolio diversification comes into play.

Counteracting and counterbalancing one asset class with several asset classes will offer solace when things turn south. Not all diversified portfolios can crash. In case one dips, the other asset classes cover the loss. An investor can rebound back even after the collapse of one line of investment. The same applies to diversifying the forex portfolio. When you invest in different forex or currency pairs, you stand a chance of remaining in business compared to someone who specialises in a single currency pair. In any case, what are some advantages of forex portfolio diversification?

Taking advantage of various investment asset classes or instruments

Achieving long-term investment goals

Safeguarding the capital

Attracts the compounding interest

Minimises market volatility impact

Minimises time you spend monitoring the portfolio

You gain both physically and emotionally

You can shuffle between various investments.

Now, let us elaborate on the above points.

Taking advantage of various investment asset classes or instruments

Choosing different investment asset classes increases the ability to reduce the trading risks. Having both high-risk and low-risk investments balances the trading equation. Different forex portfolios will see a balanced return and risk to your investment. The profits gained from other investments will cushion none/ slow performing assets.

Achieving long-term investment goals

When an investor invests in high performing forex portfolio, market volatility with a positive impact, chances are, the investor will realise high returns. Remember, each asset type has its fair share of pros and cons for long-term trading or investment. Any positive impact on the asset will translate to generating more returns for the investor.

Safeguarding the capital

Of course, every investor aims at making good returns on their investments. Not a single person would want to start a trading game that puts their capital investment in jeopardy. The type of forex portfolio diversification depends on various factors such as age, needs, duration and others. However, every investor would want to have the best diversification combination that would guarantee the safety of the trading capital. Good diversification ensures that an investor achieves their investment goals even while maintaining the trading risks at minimum levels. If you find yourself in a financial market that is extremely volatile, forex portfolio diversification comes in handy.

Attracts the compounding interest

Some investments attract more rates than others do; therefore, one enjoys a compounded interest. This happens when an investment generates interest in both capital and accumulated returns or interest. Therefore, diversification helps an investor to generate more on some options than others.

Minimises market volatility impact

Diversification can help reduce the overall forex portfolioexposure. That diversification involves various asset classes so any volatility impact in the market will probably go down. There is a reduction of industry-specific risks.

Minimises time you spend monitoring the portfolio

The time you spend on market analysis or worrying may be reduced because a diversified portfolio will not require much of your time. Remember, the portfolio’s diversity can give you the confidence to relax because not all the investment options can perform badly at a go.

You gain both emotionally and physically

Forex portfolio diversification gives you peace of mind. Once you divide your investment into various asset classes, the stress on how they perform is minimal compared to a single-asset investment. Once the sources of income increase, the risk levels are reduced. To sum up, you will benefit both physically and emotionally once you decide to build a diversified forex portfolio.

You can shuffle between various investments.

Shuffling investments allows you to take advantage of the market behaviour. By doing this, you spread your investment portfolio on a wide range of asset options.

What does a Diversified Portfolio look like?

A diversified forex portfolio comprises a combination of several forex investment options. They include different investment vehicles and asset classes. These investment models expose the inventors to different geographical locations that limit the risk of investment to each asset class. The reason behind this type of forex portfolio investment is to realise returns on some asset classes and see the reduction of risks on a single asset. Take it this way, if you have a single asset investment, and by bad luck, its price or value dips, your loss will be a lot more than where you have various asset classes trading. Diversification comes to suppress the risk in portfolios. Even where one asset has attracted a loss, that loss may be neutralised by the good returns from a different asset class in the same forex portfolio. The type of asset classes you want to use determines how far you can reduce the impact of risk in your forex portfolio.

Remember, each asset class reacts differently, even in the same market conditions. This implies that while some will reduce the impact of risk, others attract losses, and some others attract high returns. The act of balancing is where the magic lies. For example, asset A makes a loss of $200, while asset B attracts a profit of $100, it will have reduced the impact of risk by $100. Now, the magic applies here, asset class C pulls a surprise profit of $300. The net effect will offset the negative balance of $100 and realise a profit of $200 at the end. What could have happened if you had only asset class A alone? You would have made a tremendous loss, but with diversification, you can make a profit.

However, the question still lingers, what does a diversified portfolio look like? Some say it is the one where people are trading in bonds, cash, or funds. Others say it should include operar acciones, commodities, metals, oil, property, or operar futuros. However, the emergence of digital currencies has shaped forex portfolio diversification over years.

Having a diversified forex portfolio has been made easy by the many trading online platforms that offer educational materials. Yes, even in the diversified portfolio, you can make losses with some asset options, however, others will generate high returns, balancing, or reducing the net effect of the loss made. Diversifying your forex portfolio is the best way to potentially reduce investment exposure and potentially generate somegood returns.

Disclaimer:
This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. FXCess is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication