The Diversification Effect

No two people are the same. To some extent, this phrase applies to those in the investment world. However, while each investor would have respective tendencies, preferences and even approaches; at the very core, the fundamental idea of investing remains the same – to consistently grow and preserve wealth. Then again, this is easier said than done.

It is often said that death and taxes are the only two guarantees in life. In the investment world however, another two guarantees are observed: (1) change is constant; and (2) every cycle has its ups and downs.

While one can be working hard to identify opportunities, sometimes downturns and market corrections may hit without so much as a hint. Against such backdrop, it makes eminent sense to work around a diversified portfolio as opposed to timing the market in attempts to handpick the “fastest horse”.

No matter how safe or strong the conviction may seem to be, there is a simple logic behind not placing all your eggs into one basket. For instance, different assets may have varying reactions to changing market conditions. It is not uncommon for winners from a particular year to become underperformers in the next, and vice versa. Thus by diversifying your investments, you are more likely to soften the impact on the downside, and may even open doors to unexpected gains from cyclicals.

Some of the common approaches to diversification that comes to mind may include investing across asset classes, sectors, and geographies. In this article however, we intend to focus on one aspect that is often overlooked – currency diversification. Now this does not refer to trading in the FX market per se, but rather building a portfolio with a well-balanced currency exposure; such as by investing in domestic and foreign assets.

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