The stock market is becoming increasingly volatile. On Tuesday, investors were pleased, as the market roared back to life producing a solid rally. It didn’t last, though, and today saw a sell-off, with 29 of 30 Dow blue chips ending negative. This is the time that the market gives consumer traders a sharp reminder they need to diversify their investments.
Diversification is a key concept of good investing. The problem is, even for those who practice diversification in their stock market investments, most don’t diversify enough.
What is meant by this?
Let’s say you are a traditional stock market investor. Instead of putting all of your money into a single stock holding, you would be wise to invest in many different well-chosen stocks. If one or two fail, losses will be covered by gains from better-performing stocks. A common metaphor is the bed of nails. Try to take a nap on a bed with just a couple nails, and your time is likely to be anything but restful. Add a bunch of nails, and your risk is distributed widely and you don’t get hurt.
But this kind of diversification only works if the stock market as a whole doesn’t fail. If you are well diversified in the stock market, but all stocks plunge during a heavy bear market, your diversification won’t do much for you. Today’s investors are well advised to be invested in assets and markets outside of the traditional stock market. Examples include commodities like gold, binary options, such as through Banc de Binary, commercial and residential real estate holdings, and many other non-stock investments.
Not every kind of investment has the same sort of risk. Very often, gold values and stock market values don’t have very much to do with each other at all. The same is true for real estate markets.
There are some events that can cause negative ripples through all of these markets (no combination of investments totally eliminates risk). But carefully selecting investments according to their place in your risk-diversification portfolio strategy can offer a number of advantages over investors who invest within a single market.
Furthermore, there are certain kinds of investments with risks completely unrelated to the others. The best example is the binary options investment industry. Binary options trading has nothing to do with the health of the stock market, even though these trades are often built upon the value changes of the stock market.
Binary options traders don’t actually own the stocks (or gold, or commodities, or currencies, or anything) they are focused upon. A binary trader is interested in correctly anticipating how these real world financial entities will change in value over time. By investing money in a specific value speculation, and watching the value follow the prediction over a selected period of time, binary investors sit outside of the stock market industry entirely, even as they watch it with interest.
Binary trading is possible even if, theoretically, every single stock in the world is in decline. For this reason, binary trading is a great option for experienced traditional investors, who know something about why stock and asset values change. By correctly anticipating these changes in the short term, and risking money on the wager, investors can make money, even if the real stock market is in decline. Combine binary trading with traditional investment, and you’ve become much more diversified in terms of risk.
Just to emphasize how important diversification is, especially right now, technical traders today say the market appears to be forming a “head and shoulders” pattern. That indicates the possible start of a bear trend if there isn’t a breakout to the upside.