Learning About Diversification And Managed Futures
When it comes to investing, many experts advise diversifying your portfolio
. This means that you should spread your assets over a variety of different investments.
Many financial experts have said this is the single most important rule you can follow to have a successful portfolio.
Diversifying your portfolio is important because your investment performance should fluctuate less. This means that your gains and losses stay fairly consistent.
It is better able to stay consistent when you diversify because losses from some investments are offset by gains in other investments. Therefore, you have less risk by spreading out your investments than if you put all your money in just one type of investment.
Diversification also makes sense because no single asset class performs best in all economic environments. The financial world is always changing and it is hard to predict what will happen next.
In a diversified portfolio, a decline in U.S. bonds may be offset by good performance from international stocks.
You can diversify with the help of three basic tools. The three basic tools you need to diversify are cash, bonds, and stocks.
The first basic tool is cash. Cash includes money market securities, such as Treasury Bills and short-term certificates of deposit. Cash provides the lowest rate of income but also has the least risk involved.
The second basic tool is bonds. Bonds are IOUs issued by corporations, governments and federal agencies. Compared with money market investments, bonds have longer maturities and provide more income.
The third basic tool is stocks. Stocks often represent more risk than other types of financial assets.
Although there is more risk involved, over longer holding periods, stocks usually provide the highest returns and the greatest margin over inflation out of the different types of investments.
How much emphasis you place on stocks for growth, bonds for income, and money market securities for safety and liquidity will depend in part on your tolerance for risk and your time horizons for achieving your financial goals.
When diversifying your portfolio, it is always good to have a plan and goals to help increase your success. Most experienced investors will pursue a diversified strategy by using all three types of assets.
To make a plan identify which assets you would like to invest in and how much you are willing to invest in them. Determine how long you would like to hold those assets and when you would be willing to sell. Determining these things will help you develop your strategy.
Over the long term, a diversified mix of assets can outperform a very conservative investment in money market securities or Treasury bills and at the same time avoid the higher risk of an all-stock portfolio.
To earn these high returns, however, a diversified investor must be willing to tolerate more volatility in annual returns than an investor in Treasury bills, but considerably less than someone who invests only in stocks.
Keep in mind that a diversified investment strategy does not eliminate risk or guarantee success. It does offer a way for you to earn potentially higher returns over time without exposing you to the greater risk of more aggressive strategies.
As investors seek to diversify into different asset classes many are turning to managed futures as a solution.
Managed Futures are a form of alternative investment, similar to a mutual fund, that takes long and short positions in futures contracts, government securities, and options on futures contracts.
Managed futures are generally considered to be investments that are watched over by a commodity trading advisor. A commodity trading advisor, also known as a CTA, is a person or entity registered with the Commodity Futures Trading Commission and a member of the National Futures Association.
A CTA will invest in the futures and options markets in the account holder's name. A CTA is not allowed to accept trading funds in his own name or his company's name. All traded funds must be in the investor's name. This policy helps secure you and your money.
We can see that diversification is much more than it used to be. The options available to investors are growing and changing at a rapid pace.
Managed futures may not be for everyone as they are generally considered to be significantly more risky, but if you are a high net worth individual or a person who has a greater risk tolerance, an investment in a managed futures product or a portfolio of managed futures products may be worth looking into.
As you diversify your portfolio you will be able to see the benefits of putting your money into different types of investments, especially managed futures.
by: Jack Landry
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