The risk is the biggest problem for all investors, as it is no secret that with great potential returns comes great risk, whilst low-risk investments do not offer great potential. This is the case for any individual investment. However, when creating a portfolio of multiple investments, the average risk overall across all investments can be decreased, despite all the individual investments being high-risk, high-return. This occurs when the investments are in many different forms and are unrelated to one another (i.e. different markets, different types of investments); this is known as diversification.
There are various financial products and potential investments to diversify a portfolio. For example, one can include index funds, bonds, stocks, mutual funds, and exchange-traded funds.
Exchange-traded funds and mutual funds are inherently diverse on their own, as they contain many different stocks or index trackers within them. For example, they may be a basket of 50 different hand-picked stocks across different markets. These can offer great returns, which wouldn’t be affected if a couple of the companies had their price crash. Index funds are also an opportunity but work slightly differently. These are designed to mirror an entire market, which is measured using an index. The most popular index to track is the S&P 500, and although within this market there are many different, unrelated companies, the market as a whole isn’t entirely diversified, which is known as systematic risk. Furthermore, funds are usually managed, which can mean paying high management fees.
To diversify your own portfolio you may use online stock trading along with purchasing bonds. Mashreq NEO’s Stock Trading Account is possibly the best online trading platform in UAE and can be used for online trading and to track charts, historical prices, and other technical analysis tools. For example, it may be that there are a handful of targeted stocks that are in separate markets (an automobile company and a retail fashion store). The risk may also be more diversified if they were in different markets, for example, the FTSE 100 and the Nikkei 225.
In addition, it may be recommended by some to supplement the stocks with some bonds. Bonds are typically low-risk and stable but have low rates of return. Having investments with different rates of returns likely mean the portfolio is exposed to less risk than investing in only high-return investments.
Currency is another popular form of investment, though it is a challenging one. Having a Forex Trading Account is a popular method of forex trading in Dubai. Online forex trading can be supplemented with other forms of investments to diversify the risk, but this isn’t the only way. It is also common to diversify the forex trades themselves.
With a Forex Trading Account at Mashreq Neo, there is access to the live foreign currency market. Tracking the price changes of different currencies, it can be calculated which currency pairs are correlated. This means that when one pair, such as GBP/USD, changes direction, another currency pair also changes direction. It is then expected that currency pairs that have a relationship should be avoided in order to diversify the risk within forex trading, otherwise various trades may return a loss at the same time because they are connected.
The key to a diversified portfolio is to have various different types of investments, and within them are different markets. Most importantly, all the investments are all varying in risk and return. For example, if there are some high-risk stocks that you are targeting in a volatile technology market, it may be a popular choice to pair this with a low-return investment such as a bond.
Disclaimer: This article has been prepared solely for information purposes. It does not constitute an investment advice, solicitation, offer or personal recommendation by Mashreq, or any of their related parties to buy or sell any securities, product, service or investment or to engage in or refrain from engaging in any transaction, particularly, in any jurisdiction where such an offer or solicitation would be illegal. Neither Mashreq nor any of their related parties warrant the accuracy of the information provided herein and views expressed in this article reflect the personal view which does not take into account of individual clients’ objectives, financial situations or needs. Investors are required to undertake their own assessment and seek appropriate financial, legal, tax and regulatory advice to determine whether such investment is appropriate for them in light of their experience, objectives, financial resources and other relevant circumstances. Neither Mashreq nor any of their related parties accept any liability whatsoever for any direct, indirect, consequential or other loss arising from this article and/or further communication in relation thereto. Mashreq do not accept any obligation to correct or update the information in this article.