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Reasons You Should Consider Diversifying Your Financial Portfolio

25 February 2018 No Comment

The investment landscape is peppered with landmines. Seemingly safe asset categories can become sinkholes overnight. Consider the current state of global bourses as a case in point. After multiple years of robust performance, a major correction in mid-February 2018 wiped out trillions of dollars within a week. True to form, markets have recovered somewhat but levels are markedly off their December 2017 highs. Whether it’s commodities like crude oil, gold, silver, platinum, or stocks like Google, Facebook, BHP Billiton, Glencore, Anglo American, or Boeing, one thing is assured: volatility. It’s precisely this volatility that gives rise to profit-making opportunities in the financial markets.

One of the most notable booms in 2017 was that of cryptocurrency trading. Most everyone bought into the hysteria, helping Bitcoin, Ethereum, Litecoin and some 1,500+ other cryptocurrencies to hit stratospheric levels. Just as quickly, the bubble began deflating. From around $20,000 on December 17, 2017, Bitcoin dropped below $7,000 per unit by 2018, and has been struggling to breach the $11,000/$12,000 barrier. Cryptocurrency is a classic example of how speculative sentiment can drive trading activity. One needs to exercise caution when investing in financial assets. They are not all created equal, and if the fundamentals do not reflect the reality, the bottom will fall out. This is precisely what happens when markets overheat and ultimately must undergo a correction to re-establish the correct value.

What Is the Right Mix of Assets in an Investment Portfolio?

The precise mix of domestic and international equities, bonds, cash holdings, ETFs, cryptocurrency, et al will vary from one person to the next. Your appetite for risk determines the precise allocation of funds in your specific investment portfolio. Risk seeking individuals favour a portfolio comprising a majority of equities, and a minority of fixed interest-bearing investments such as CDs, cash in the bank, treasuries etc. Risk-averse individuals have precisely the opposite allocation. These folks may invest in equities, but only blue-chip equities that have shown slow and steady growth over time. New age tech startups do not qualify as stable investments, neither do pharmaceutical companies or biotech enterprises.

Use CFDs to Bolster Your Portfolio

Precisely where cryptocurrency fits on the spectrum is up for debate. Many of the leading financial analysts and CEOs have dismissed Bitcoin and its ilk as nothing more than a bubble about to burst. However, the blockchain technology that underpins these new digital currencies has merit and is widely being adopted by banks and financial institutions, commercial enterprises and individuals around the world. Nonetheless, a minority allocation of funds to cryptocurrency is generally considered a really good idea.

Then there are hedge investments that can be made. A hedge is a security against adverse market behaviour. For example, if you hold a substantial allocation of gold shares either through an exchange traded fund, or individual shares in a company, you may wish to protect that investment in several ways. You could split your funds between gold shares and traditional equities since they typically move in opposite directions, or you could protect your gold shares with gold CFDs.

The concept of a CFD is rather extraordinary according to Olsson Capital trading veteran, Montgomery Smythe:

A CFD, or contract for difference is a derivatives trading instrument where you can buy or sell a contract at a specific price for delivery in the future. If you believe that gold is going to decrease in value, you could purchase a gold CFD as a put option (a bearish position) and you could profit if the gold price decreases. That way you are actually protecting your gold shares investment without even purchasing any additional shares in gold. Since a CFD is merely tracking the price movement of an underlying asset, you don’t endanger yourself further in the event that the asset decreases in value. Additionally, CFDs don’t require traders to have all the money available upfront for all the contract amounts they wish to purchase. There is a margin requirement, and you can enjoy leverage to ramp up the buying power of your money. That way you have more funds available to purchase additional assets, or to simply keep as cash in hand.

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