You may have heard about the importance of diversification in the world of investing, and how it has the ability to really boost your profits while limiting your risk to a minimum. But do you really know how to go about diversifying your investments effectively? In this article, we will walk you through 7 different strategies you can use to diversify away from some of the risks that comes with more traditional investments in stocks and retirement funds that we all have.
We will give you an introduction into how you can get started with forex trading, precious metals, and options, using some of the simple tips and tools we have used for ourselves to generate consistent profits from the markets, regardless of where the economy is headed.
Difference between trading and investing
First of all, let’s clear up some confusion. People who are experienced in the financial markets always distinguish between trading and investing. So, you may be wondering, what is really the difference between these two terms?
In short, traders are looking for short-term profits and investors are looking to take part in the capital appreciation that happens over the long-term.
Mutual funds in the stock market is a favorite among investors. In a mutual fund, the investor simply deposits his or her money, and then sit back and enjoy the capital appreciation that naturally happens over years.
Traders, on the other hand, are typically present in the forex market, options, commodity futures, cryptocurrencies and other asset classes that do not necessarily appreciate over time. However, these markets are known for their volatility, which creates opportunities for people who know how to take advantage of short-term price fluctuations.
In short, traders are looking for specific set-ups or triggers in these assets that they believe will give them a boost and an opportunity to profit in the short term.
7 ways to diversify
1. The first thing we should consider when we look to diversify is if the asset we are investing in is corelated or not to other assets we have already invested in. For example, if you already own shares in a gold mining company, then buying more shares in another gold mining company is not going to give you the diversification benefit you need.
2. Another way to diversify away from stocks is to use the options market for hedging and as a form of financial “insurance policy.” Options can be traded in ways that give you large pay-outs if something dramatic happens in the market, while you only have to pay a small fee if nothing happens.
3. Learn to trade forex. In the forex market, it’s as easy to profit when the market is going down as it is when the market is going up. That means that there are always opportunities to make money, even when the stock market is a horrible place to be for other investors.
4. Learning to short stocks is another strategy that can save you during downturns in the stock market. When you short a stock, you are essentially betting that the stock will go down in price, and you will profit accordingly if you are right. This way, you can easily counter any losses elsewhere in the stock market!
5. Invest in precious metals like gold and silver. These are so-called “safe-haven” assets that tend to rise in price when the rest of the market declines. As such, it is also a great form of financial “security policy” with very little potential downside risk. In particular gold is one of the most stable financial assets that exists, which means that it can provide you the security and stability you need in an uncertain world.
6. Discover the benefits of owning foreign stocks. It’s important to learn that you don’t need to limit yourself to your home country when making your investments. Investing in foreign stocks has several diversification benefits that are worth pointing out.
First, risk is not tied to the economy in your home country. And second, the asset is denominated in another currency, which protects you in the event your home country’s currency were to decline in price.
7. Learn shorter-term trading strategies that can help you make money in any market environment across assets such as stocks, forex, and even cryptocurrencies. With some of these strategies, professionals who have learned to master them are able to produce consistent profits no matter what the overall direction of the market or the economy is.
In some ways, short-term trading is the ultimate skill to learn for anyone interested in achieving financial independence for themselves and their families.
We hope these strategies were interesting for you and that you will be able to take advantage of some of them to achieve your investment goals. If you do, we would be happy to hear from you what worked and what didn’t so that we better can help more normal people like yourself in the future!