Forex Asset Class – Diversify Your Portfolio
A diverse portfolio is vital, particularly when market conditions are volatile. Forex, or foreign exchange is an exclusive asset class that should be considered for any portfolio, as it has the capability to create absolute gains in any market.
Why should you diversify your portfolio? Well, read the passage below to see what can happen, and indeed did happen.
Only a few years ago, between the years of 2003 and 2007, money was being made hand over fist purely by going to bed at night and waking up in the morning – investors were putting their money into the stock market which was flourishing. The price of oil was escalating and the whole world economy was growing swiftly due to the fact that there was inexpensive credit, interest rates were very low and China was consuming massive resources.
The price of real estate was exploding. Everyone seemed to think that property investment was a sure fire tactic to becoming very wealthy. Banks were practically begging you to borrow their money, so investors didn’t even need to have the money to buy property.
However, the unthinkable happened. The US property market bubble burst spectacularly, closely followed by Europe and then finally to the rest of the planet.
Subsequently, many of the world’s banks failed which led to credit being frozen to investors. The outcome of this meant that the world’s stock markets crashed and China’s economy decelerated to a virtual standstill causing the price of commodities to slump. The cost of oil for a barrel fell from a high of $147 to a meagre $34.
Nothing lasts forever. There are booms and busts and by diversifying your portfolio, you won’t leave yourself vulnerable to major changes in market conditions.
Diversification within portfolio management has constantly been an essential component because it reduces risk by dispersing it around various asset classes. The recent market instability has highlighted this and it has become increasingly apparent.
You will find that established asset classes normally shift in tandem in a similar direction because they are very much interconnected. Real estate, commodities and equities all shifted up simultaneously as inexpensive credit inflated the global economy and then, all plummeted together significantly when the markets collapsed in 2008 and 2009.
As a consequence of the crash, investors didn’t have many alternatives to shield themselves against the downside. Today however, the case is very strong to add unconnected assets to the portfolio of investors.