The Number One Secret To Diversification

Here is the number one secret to market diversification, spread the risk and trade in non correlating assets.

Here's an example of a non diversified portfolio.

Say you are bullish on Crude Oil and you buy a futures contract in crude, but what if the rest of your portfolio was full of energy stocks?

What you have created is one basket of eggs. In this case a basket of energy eggs. Your portfolio is dependent on one sector and that is energy. This is just too risky for the average investor. No matter how many stories you hear from the various experts saying that energy is going through the roof you don't bet the farm on one market ... ever.

You need to have as many non correlating asset classes as you can follow. This short video illustrates diversification perfectly.

The other key to diversification is cash. You don't have to be in all the markets everyday. Cash is a way of diversify ... Swiss Francs, Canadian Dollars, Euros, etc etc.

Here's an example of how a well diversified portfolio.

Stocks, bonds, futures and cash.

Out of those four asset classes, you have a multitude of choices. Stocks allow you to cover a broad spectrum of different domestic and international sectors. Bonds do the same thing, and the futures markets cover everything from raw commodities to financial instruments.

You can divide your portfolio into different percentages and allocate then to various asset classes. The more you divide into non correlated asset the less your risk will be.

Here's what I am suggesting. I call it the Will Rogers approach to trading.
The American humorist Will Rogers (1879 - 1935) had a special way of making a point. Here's another one of his insights about trading and investing.

Here are two of Will Rogers most famous quips.

"I'm more concerned about the return of my money than with the return on my money".
-- Will Rogers

"Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it". -- Will Rogers

Will was right!

Only buy sectors when they are going up. (Here's how to tell if markets are going up). When they turn down, get out and move into cash. Then look for another non correlating market sector for your portfolio that's moving up. For sophisticated traders you can even short different asset classes which is a way to turbo charge your returns.

Learning when a market is moving higher or lower is not as difficult as you might think. Take a look at how you can tell if your favorite market is going higher or lower here.


J. Adam Hewison

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