Friday, October 12, 2007

Portfolio Risk: Diversification is not the only way

In a properly diversified portfolio it is important to not only diversify within an asset class but ensure you have assets that work ‘out of tune’ with one another. If you were to have all of your investments performing well at the same time beware as when there is down in the market they’ll all most likely head the same way.

Simplistically let’s look at it this way: you have two investments a winter one and a summer one. They both perform well in season but not so well off-season – they could be positive 10% and negative 10%. By placing the two together you then get the average return of the two.

1 comment:

contrary canary said...

Have you considered being long and short at the same time; this might be similar to what you're saying. If you trade options at all you can be long 5 companies with calls and short 5 downtrending co's with puts, this has worked fairly well for me of late.

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