Diversifying a trader's portfolio

Every day, millions of transactions occur in the market. And no matter how popular an asset is, no matter how much attention market participants pay to it, there is always a risk that some unforeseen event could affect the price substantially. Here, of course, you must correct me, because everyone in our community remembers that news does not affect the price. However, the actions market participants take under the influence of that news, of course, do. Therefore, the participants can move the price up or down with their money. For an investor, in terms of money management, the major risk is a significant decrease in demand for the asset he bought. There can be several unsuccessful purchases, and instead of the expected tens percent of annual return, one day you may see a significant drawdown, which will hurt your motivation and mood. The concept of the diversifying portfolio was invented to reduce such risks.

Portfolio diversification means the composition of an investment portfolio by buying different financial instruments not related to each other.

In other words, it’s a “don’t put all your eggs in one basket” rule. Even if you are confident that the market will rise, it is unreasonable to buy one asset only. It would be more efficient to divide capital and buy several, not interrelated assets.

After reading this diversification definition, a beginner may have a misconception of what it really means. At a first glance, the advice “don’t put all your eggs in one basket” looks simple – don’t buy 1-2 assets with all your money, but rather allocate capital to more assets and systematically accumulate them at a certain ratio.

Have you gone to the stock exchange yet? 😊 Stop!

Secure asset storage

Diversification of a stock portfolio, or etf portfolio, or any other set of assets should not start with the choice of assets, but with the choice of the site where they will be stored. This can be both exchanges, which should also be chosen thoroughly, as well as various hot and cold wallets. Therefore, the advice “do not put all your eggs in one basket” applies, first and foremost, to the safety of your funds, rather than the selection of specific assets. Ideally, capital should be distributed among several top exchanges. Also, for those who plan to make transactions infrequently, you might want to look at hot wallets for greater security:

• MetaMask
• Exodus, etc.

Or cold ones:

• Ledger
• SafePal
• Trezor, etc.

Investment and speculation. The difference

The line between investment and speculation is quite blurred, but there is still a difference. The goal of speculation is to make a profit after the position is fixed. Such fixation can take place both within a few minutes and after a few months.

An investment is making a profit without fixing the asset. The most trivial example is buying an apartment and renting it out. Now, with the development of stacking, such opportunities have appeared in the cryptocurrency market as well. By buying an asset, we can not just keep it as a dead weight in our wallet, but also increase its amount thanks to, for example, stacking.

Also in the case of speculation, we may lock our positions without waiting for our targets, if the market situation sharply changes to our disadvantage, in the both short and long term. Diversified investments, on the other hand, do not typically require a premature fixation of positions, no matter what happens in the market. Conversely, a strong price dip, in this case, can be a good reason to increase a position.

Principles on how to diversify portfolio

While the basis of our actions for speculation is a trading strategy, the investor portfolio cannot be built without a trading plan, which should include:

1. The investment horizon and the list of targets we ultimately want to achieve.
2. The distribution ratio of diversified funds between exchanges, hot or cold wallets.
3. The maximum possible number of assets in the portfolio and their distribution ratio to reduce risk.
4. Conditions for buying or increasing a share of an asset.
5. Criteria for partial exit from positions or their complete fixation.

In cryptocurrencies, as well as in traditional stocks, so-called asset classes have formed. These can be Defi projects, exchange-traded tokens, old conservative coins (BTC, ETH, LTC) or new assets that have become popular recently. In any case, diversification of an investment portfolio also includes the distribution of assets into classes. Where there is an unplanned bias towards one or another asset class, portfolio rebalancing should be performed.

When to buy?

Most newbies build their portfolio in stocks on the basis of advice from popular bloggers, course authors, and other infomercials and dubious individuals, who seem to them to have much more experience and authority than those who are trying to figure this out on their own. It is wrong and even a little naive to think that you can easily reproduce someone else’s results by repeating someone else’s actions. Everyone has different initial financial capabilities and investment horizons. Someone is ready to add a certain amount of capital every month, and someone does not plan to make any new additions at all.

There is a fairly popular strategy where purchases are made at regular intervals, without looking at the price and at a small fixed volume. This is the DCA (dollar cost average or dollar cost averaging) strategy. How justified such purchases are without regard to market logic is, of course, a debatable issue, not to mention how psychologically difficult it would be to buy an asset that is growing week to week.

Therefore, you should strive to make the decision on what to buy, when, and at what price on your own.

What does Resonance have to do with it?

Can Resonance become an assistant in building and diversifying long-term investment portfolio? Definitely! In lesson 7 of the first level of training “Capital Management: Diversification, Money Management”, the rules of diversification and points to focus on when managing capital are discussed in detail.

The trader should always remember that:

Every market action must be logically justified in terms of supply and demand, be it a speculative purchase or a long-term purchase of an asset with a strong intention not to sell it for several years. This way we try to neutralize the influence of emotions on our actions.

Surely, with a long-term investment horizon it makes little sense to choose the most comfortable buy price on the minute timeframe. However, it is quite possible to take a couple of hours a week to view the cluster chart on the daily timeframe.

Perhaps it is at this point, after a strong fall, that noticeable volume traces of a strong buyer are formed. Especially if the indices have also been falling for a long time. Based on the totality of factors, we can conclude when exactly buying to increase the share of the asset is the most justified.

Obviously, Resonance won’t help you buy a certain part of an asset at the best possible price every time. However, these purchases will definitely be justified in terms of supply and demand, rather than being spontaneous, intuitive, etc.

In lieu of a conclusion

A perfect investment portfolio should ALWAYS contain unallocated funds to buy assets should the price drop. After all, each purchase, even by a small amount from the overall deposit, after a good price decrease, reduces our average purchase price and, therefore, our potential profit when the investment goals are achieved grows.

Investments may seem boring to some people because there is no such emotional drive as in speculation. However, that’s their advantage, because their mental impact is much lower. The main requirement is to follow the principles of diversification, and then even the collapse of a single asset (we all remember Luna or FTT) will not have a significant impact on your trading plan and investment deposit.

Trade and invest wisely.

P.S. All advice in this article is advisory only.