The world’s financial markets have undergone a unique period of volatility through 2020 and the formative months of this year, with global stocks offering a relevant case in point.
Currently, Warren Buffet’s global market indicator is sitting at a troubling 142%, having peaked at 205% just a couple of weeks before. This measures the share price of firms against national GDP, with the current reading indicative of an overpriced market that could be on the precipice of crashing.
With this in mind, diversification is crucial when looking to create a profitable investment portfolio. But what does this mean and how can you go about achieving such an objective?
In simple terms, a diversified portfolio describes a collection of different investments that combine to reduce your overall risk and exposure as an investor.
If you trade stocks, for example, you should strive to leverage assets from several different industries and countries, while also tapping into variable market caps and companies that boast diverse risk profiles.
You should also augment this with practices such as forex trading, while also considering other investments like fixed-income bonds, commodities and even real estate.
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But why is this so important? Well, with the right combination of assets (which treads the fine line between being overly exposed and over-diversifying your portfolio) you can actively reduce your risk of permanent capital loss as an investor, while minimising overall volatility in the process.
Without this, it can be hard to attain sustainable and consistent profits as an investor, particularly during periods of change, uncertainty or peak volatility in specific markets.
The next step is to understand the best practice for portfolio diversification, including a number of different tips that can afford you an advantage regardless of the prevailing market conditions. For example:
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