When market conditions are unpredictable and risky, it is very important to maintain a varied portfolio with many asset classes. Don’t keep all of your eggs in one basket, as the saying goes.

On such asset class that should be contemplated for any diverse portfolio, is foreign exchange, or forex. It has the capacity to generate absolute gains in whichever direction that the market is heading.

Why is it important to possess a varied portfolio? If you read the following section, you will see what actually happened, leaving countless investors that had all of their eggs in one basket losing the majority of their investment.

Investors were creating huge amounts of money back in the prosperous years between 2002 and 2007. The stock market was thriving as investors put their money into it. Literally overnight, they would wake up in the morning and find their accounts swollen.

Oil was increasing in price, China was devouring huge amounts of resources and the world’s economy was expanding at a great pace due to low interest rates and cheap credit.

Real estate was booming and prices were going through the roof. Investors believed that property was a guaranteed way to riches. It wasn’t even necessary for investors to have any money because the banking community were as good as pleading with customers to borrow money from them.

All was well in the world….. until the unimaginable occurred.

The housing market bubble dramatically imploded in the United States. Europe’s property collapse soon followed and finally the rest of the Earth tailed.

As a consequence of the property crash, many banks throughout the world collapsed which led to investors having their credit suspended. Without going into too much detail, the world’s stock markets plummeted and the Chinese economy stalled to almost zero growth which brought about a nosedive in the commodity price. Where previously a barrel of oil cost almost $150, it fell to a low of just $34.

Many investors that had a fortune in stocks and shares and property were left licking their wounds and counting the cost of their losses. The majority on investors that weren’t left devastated by the crash were the ones that were wise enough to diversify their portfolio. By spreading the risk, they limited the amount of damage to their assets and were able to carry on trading.

Portfolio management involves many components and diversification with different asset classes is essential to reduce overall risk. Market uncertainty over the last several years, since 2007, has emphasised this point profoundly.

Investors have been shocked into the fact that they need to protect their assets from the downside and are adding the forex asset class to their portfolios. They understand that it is a distinct and independent class from the more traditional and well known asset classes.

These estparallelchartablished asset classes are very much interrelated and as a rule, typically move together in a parallel trend. Commodities, equities and property all moved upwards at the same time because the global economy was driven by cheap credit, and then all drastically plunged collectively in 2008 and 2009 when the markets fell to pieces.

If you want to get involved in the forex market but don’t know where to start, you could open up a managed forex account and let professional traders do all of the work for you

Martin Loader

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