Diversification is a term that you have probably heard a lot about but may not fully understand. It’s a key element in trading & investing. In this blog post, we will discuss what diversification is and why it should be the target when constructing a portfolio.
Diversification is a risk mitigation technique that involves investing in a variety of assets. By investing in a variety of assets and strategies, you are decreasing the risk that your portfolio will suffer if one asset class or strategy underperforms. For example, if you only invest in stocks and the stock market crashes, your portfolio will likely lose value.
However, if you have a diversified portfolio that includes stocks, bonds, and other asset classes, the chance that your portfolio will lose value is greatly reduced.
The same applies to trading strategies. If you only trade a long-term strategy, you can protect yourself in choppy markets by trading a short-term strategy alongside it.
So what are the main reasons to diversify your risk?
First, it reduces the overall risk of your portfolio. Second, it provides you with the opportunity to participate in the growth of a variety of asset classes. And third, it allows you to time your investments so that you can take advantage of different market cycles.
For trading a variety of strategies you are mainly diversifying to protect yourself against different market regimes. It also allows you to increase your returns. We developed the PAI trading system to run it next to our main swing trading strategy, the New Capital strategy.
The PAI system trades short term and the New Capital strategy aims for larger moves over a longer time horizon, together they form the perfect match. If you’re interested in adding the PAI system to your strategies, press the button for PAI below.
Speak to you soon! Kind regards, Joost