Chapter 21

Practicing Diversification

In This Chapter

arrow Mixing up your trading markets and methods

arrow Foregoing trend trading for other strategies

Diversification has long been one of the hallmarks of traditional investing wisdom. The idea is that by diversifying the markets in which you trade or invest, you minimize your risk. It’s congruent with the old adage, “Don’t put all your apples in one basket.”

In this chapter, I show you several methods to diversify your portfolio. You can choose one or more depending on which ones appeal to you.

Trading Various Markets

The most common technique used to diversify portfolios is to invest in a diversified mix of markets. In this section, I show you a couple of ways to do that.

Uncorrelated markets

Diversifying your risk isn’t as simple as trading more than one stock. Most stocks tend to move in relatively the same pattern of the stock index to which they belong (S&P 500, DOW, NASDAQ, and so on).

remember.eps To truly diversify, you need to trade markets that don’t normally trade alike. Here are a few examples of markets that often have various degrees of correlation, thus providing risk diversification:

  • U.S. equities
    • Large caps
    • Small caps
    • Various sectors ...

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