Diversification is a very common topic for those looking to improve the quality of their investment portfolio. Putting all of your eggs in a single basket can be quite risky, so it’s always good to have variety. Stocks, funds and certain commodities (such as gold) are the most common components of the average person’s portfolio, but the largest market in the world is actually the foreign exchange market. Is it something you should diversify into?
Day trading is the biggest trend in the world of forex right now. This means making numerous trades within a single day, and never carrying over a position to the next day. For this, most traders will use technical analysis; they’ll observe price charts and short term trends in order to make their decision. It’s a very hands-on method of interacting with the markets, and as such, it’s not really suited to adding to a portfolio. This is what you’ll hear about most frequently when people talk forex, but it’s not the side of the industry that you need to worry about.
Longer term trends are just as important as the shorter term ones. While forex is immensely popular because of its ability to provide profit in the short term with a relatively modest investment, it is also useful for those who want to put a large amount of money into the market over a longer period.
Exposure to Regional Economics
One of the major benefits of doing this is that currencies don’t move in lock step in quite the same way as the equities market does. Some experts have asserted that the equities market is in fact more than 80 percent correlated, which means that adding currencies to your portfolio will give you exposure to differing economic and monetary events. So much so that Marc Chandler of Brown Brothers Harriman believes that currencies can account for two to three thirds of the returns of a stocks portfolio.
This is of course not to say that forex is a replacement for the equities markets. It is more of a compliment to it.
Adding currencies isn’t necessarily straightforward. Many portfolios contain currency ETFs, which are reasonably useful, but they have one critical problem. While the forex market is a 24 hour, 5 day a week market, ETFs are restricted to the usual market opening times. This means that they can react very suddenly if something happens while the markets are closed.
Actual spot trading (generally known as simply FX trading) may be one of the better options, and most brokers offer it.
In conclusion, if you’re looking for a way to expose your portfolio to something other than the highly-correlated equities market, then forex could be ideal. There are inherent risks, which is why proportionally you should be careful, but currencies could well be your main method of accruing returns on your investment.