Global Macro Trading and the Benefits of Diversification
Anyone that has been trading for a long time has heard that diversification is the only free lunch our there, referring to the economics principle that nothing good is free. The problem has been that if you went to the typical financial planner you were deworsified and not diversified. Dont worry because diversification is still very useful if done properly and really does help to increase returns and lower risks.
The typical planner will have you put some of your money in domestic stocks, some in foreign stocks, and then place some money in bonds. If that is all you are doing you are not getting nearly the benefit you could be getting and in reality you are barely diversified at all.
Diversification done right will not only have you invested in several different asset classes but also in multiple strategies inside each asset class. Ask a global macro trader why they trade this way and they will tell you that being able to go into multiple asset classes is the only way to consistently generate positive returns regardless of what the stock market is doing.
The world of global macro trading will have you looking at several different asset classes such as domestic stocks, foreign stocks, Treasury bonds, investment grade corporate bonds, junk bonds, foreign government bonds, foreign corporate bonds, commodities, real estate, and currencies. In fact some traders will get even more diversified by investing in collectibles, private equity, venture capital, etc. Basically anything that has different economic drivers is worth looking at as for a potential investment as it diversifies your risk.
As traders and investors we should all be looking for the best risk to reward scenarios out there instead of just being involved. If you are doing that then it helps to look at multiple markets so that you can always be putting money at risk in an intelligent manner.
Luckily we can diversify not only across asset classes but also across different strategies in each one. For instance if you could allocate some money to a long term value investing strategy that looks at three to five years out investing in stocks and then also invest in a good short term trading fund. By doing this you can capture slightly different types of alpha or excess return. If you build a portfolio this way you will become extremely diversified and uncorrelated to regular investments.
If you do this properly and diversify into not only different assets but also into different strategies inside each asset class you will be able to capture returns that the classis stock bond mix would have missed. While this is no guarantee of positive returns every day, over time you will see a reduction in risk and an increase in reward. Diversification is really a free lunch.
If you are a relatively active investor you can achieve positive returns in multiple asset classes yourself by building market beating models in different markets. Yes, you can and indeed should use bottoms up research but in the spirit of being efficient with your time you should automate as much as possible so that you are able to be a more efficient global macro trader and miss fewer of the potential opportunities that occur in different markets. - 23222
The typical planner will have you put some of your money in domestic stocks, some in foreign stocks, and then place some money in bonds. If that is all you are doing you are not getting nearly the benefit you could be getting and in reality you are barely diversified at all.
Diversification done right will not only have you invested in several different asset classes but also in multiple strategies inside each asset class. Ask a global macro trader why they trade this way and they will tell you that being able to go into multiple asset classes is the only way to consistently generate positive returns regardless of what the stock market is doing.
The world of global macro trading will have you looking at several different asset classes such as domestic stocks, foreign stocks, Treasury bonds, investment grade corporate bonds, junk bonds, foreign government bonds, foreign corporate bonds, commodities, real estate, and currencies. In fact some traders will get even more diversified by investing in collectibles, private equity, venture capital, etc. Basically anything that has different economic drivers is worth looking at as for a potential investment as it diversifies your risk.
As traders and investors we should all be looking for the best risk to reward scenarios out there instead of just being involved. If you are doing that then it helps to look at multiple markets so that you can always be putting money at risk in an intelligent manner.
Luckily we can diversify not only across asset classes but also across different strategies in each one. For instance if you could allocate some money to a long term value investing strategy that looks at three to five years out investing in stocks and then also invest in a good short term trading fund. By doing this you can capture slightly different types of alpha or excess return. If you build a portfolio this way you will become extremely diversified and uncorrelated to regular investments.
If you do this properly and diversify into not only different assets but also into different strategies inside each asset class you will be able to capture returns that the classis stock bond mix would have missed. While this is no guarantee of positive returns every day, over time you will see a reduction in risk and an increase in reward. Diversification is really a free lunch.
If you are a relatively active investor you can achieve positive returns in multiple asset classes yourself by building market beating models in different markets. Yes, you can and indeed should use bottoms up research but in the spirit of being efficient with your time you should automate as much as possible so that you are able to be a more efficient global macro trader and miss fewer of the potential opportunities that occur in different markets. - 23222
About the Author:
The Macro Trader helps investors find great Global Macro Trading opportunities. Tactical Asset Allocation is but one of the many strategies that we use to help find the best risk to reward opportunities across the globe.
posted by X - Men @ 6:04 AM
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