Almost all savvy investors know it is critical to diversify their investments to protect themselves from major losses. And new investors also know they don’t want to lose their shirt so there has to be something they can do to protect their money, to invest safely.
Numerous books or chapters within investing books, magazine and online articles have been written about diversification. Usually these sources focus on splitting your money amongst different types of investments, i.e. a large-cap mutual fund, an energy ETF and perhaps a sector ETF or fund.
There are other ways to diversify that are often overlooked.
Strategies – your actual investment strategies can form a method of diversification. Instead of putting all your eggs, your money, into one basket, one style or type of strategy a variety of strategies can help protect your funds and, even more so, enable you to grow your portfolio during almost every economic situation.
Having two or three different strategies for each type of investment can enable you to keep abreast of market twists and turns, ups and downs. For example, if you are investing in sectors as one part of your portfolio then you should have two or three different sector strategies. These can differ from each other based on types of relative strength analysis (e.g. alpha, relative strength momentum or return).
Knowing when to switch from one strategy to another can be easily accomplished by viewing a performance chart with each of your strategies represented in one chart – not all of your investment strategies, just the ones that focus on the same type investment; i.e. sectors or large cap funds or energy ETFs. Checking this chart every week or two can tell you in a glance which strategy to use.
Another method of diversification is to differentiate your strategies based on your buy-sell rules. For example, one strategy could have a market exit signal with a short setting for rapid response to market ups and downs while another could be set for a more moderate response that allows for normal market variations without bumping you in and out of your positions with every turn of the market, or perhaps is set for a long-term holding that only reacts to a prolonged market slump. Again, viewing a combine strategy chart will tell you which strategy is currently the best to use for investing.
A third diversification technique is similar to viewing the strategies for a particular group or investment type. This technique involves comparing the overall performance of each investment group or category (the large-cap fund, energy ETF, sector ETF, etc.) to see if one group or multiple groups are not currently giving you solid gains. Just like one or more industry sectors may not be performing well, so you may have a group that underperforms during a particular market. This is one reason to follow six to eight groups or universes of investments so you can capitalize on those that are performing best at any given time.
Looking at the equity curve of your strategies and groups or a combination chart will take but a few moments and quickly tell you which ones are underperforming.
In essence you can maximize your investment growth potential by diversifying based on:Different type of analysis
- Having 2 – 3 strategies for each type or group of investment
- Compare strategies with a quick view of a combo chart
- Vary strategy buy-sell rules to take advantage of different types of markets (flat, volatile, steady upward, etc.)
- Compare investment groups to focus on those that are growing
Thus the key to growing your portfolio, to safe investing involves diversification that goes beyond simply buying a number of stocks.