Is Diversification the Key to Profitable Investment Trading?

It’s not uncommon to be told that diversification is the key to profitable investment trading. Although it is only just one word, it can have powerful implications. If you take it to heart, you can either end up earning tons of cash or you could join the loser’s circle at the bottom of a pit. You should therefore carefully assess the advisability of this crucial step.

Diversification is actually a very simple concept that can significantly increase your profits. It simply means that as an investor, you should choose to put your money in not just one kind of market but in many. If for example, you already have a strong stock portfolio, you should take your capital and spread it across other assets such as real estate, commodities and assets.

A diverse investment trade portfolio seems to focus a lot on ensuring more gains. Because you have many investments, you can expect to enjoy more profits. This however is not entirely the reason why you should spread your capital. The main reason is actually a practical one. When you go for a wide portfolio, you are ensuring your survival. This is because specific markets can have slumps that can affect every investor. If the stock market for instance, experiences a prolonged dive or lack of movement, you always have your other sources of income to rely on. In other words, diversification is the key so you don’t end up in a ditch which is what will happen to those who put all their eggs in one basket.

Diverse investment trading then seems to be a very sensible and practical idea. Watch out though. It may not always work for every single individual. Although it makes sense to participate in several markets to secure finances, new investors may actually lose their entire floats by diversifying too early. The reason should be all too obvious. It takes more than just a couple of weeks to master making trades in one market. In some cases, it can take you years to become an expert. Having to learn how multiple investment types work can be disastrous. Trading and investing in any asset type has its technical complications.

In the business of trading, it sometimes makes better sense to specialize first. This is to ensure that you don’t lose too much too soon. You can determine where and what you want to trade by researching on the different investment types. Take note though that although your preference matters, it is often advisable to start with assets that are not leveraged. Stocks are examples of such assets. These can sometimes have conservative profit potentials but you often lose less with them than with leveraged assets like currencies.

This is not to say that you should completely shy away from diversification. The rationale behind diverse investment trading still stands true. What you just have to do though is to take gradual steps. Don’t be too excited to have multiple income streams. Take the time to master one market before you pick one or two more.

Leave a Reply

Your email address will not be published. Required fields are marked *