Portfolio diversification is an investment strategy that basically spreads risk in several types of investments.
The idea behind this strategy is if you hold all your investments in the same form as stocks and bonds in your local currency, then your portfolio will reflect performance in only two markets. However, if both markets experience a decline, the value of your portfolio will also decline because there is no hedging investment.
Traditional Portfolio Diversification
Traditionally, investors use a combination of shares and bonds in the financial portfolio for the purpose of diversification as part of the money management process. This is usually done for hedging policies to weaken economic conditions with debt instruments that continue to pay interest when stock prices depreciate due to economic slowdown.
However, when economic conditions become worse and inflation begins to erode the value of the currency, the interest on bonds will not adequately compensate for the loss of capital in stock investments.
Even housing investment can be grim, as seen after the subprime mortgage failure hit the US housing market hard.
Add to Forex into the Portfolio
While trading the currency away from the word investment, adding foreign exchange components to the portfolio by investing in foreign currency assets may be something that needs to be considered in the current global financial environment.
So back to the goal of the investor, assets in a number of different currencies can be added to the portfolio to increase diversification and balance. As another option, if all investment assets needed to remain in US Dollar investment, then the cash portion of the portfolio is at least partly exchanged for a different currency, maybe one with a higher interest rate.
Currency can also be considered as an investment in shares. A country that is experiencing growth and abundance will have many cases of strong currencies, while economically marginal countries will tend to have weaker currencies. For that you need the right analysis, you can learn it on the Forex Tutorial page.
Foreign Currency Will Be Considered
Historically, US interest rates are currently at very low levels near zero, which makes it a little bit interesting to hold cash balances in US dollars. As a result, investors may be inclined to exchange several US Dollars for the Australian Dollar.
At present, Australia has an interest rate of around two and a half percent where if the US currency is exchanged with the Australian currency it will effectively collect just under two quarter percent interest in the funds exchanged.
Another way to diversify portfolios using the foreign exchange market is to allocate part of the portfolio to commodity currencies. This will effectively protect the value of inflation risk to a certain level, especially if commodity currencies are from oil-producing countries such as Canada or gold exporters such as Australia.
Australia, Canada and even the New Zealand dollar are commodity currencies, and their economies also look healthy for some time now. The US economy is likely to recover, Japan and Europe are still slow. Local cash investments that are exchanged into several foreign currencies can also be useful to have a more diverse portfolio.
Furthermore, even though inflation has moved to the value of the global currency, having a well-chosen currency position in your investment portfolio has the potential to provide a good return on your investment over time.
By diversifying financially on forex trading, at least it will help you to increase profits in the business portfolio.