By Carl Ivory
Traders use different asset classes to diversify their portfolios because market conditions always come with risk and unpredictability. One of the asset classes that a trader can consider is the forex, also known as the foreign exchange market or fx. It can make a trader go home with absolute gains in any direction the market may go.
A sample scenario
This example shows why it is essential for a trader to have a diversified portfolio to avoid a massive downfall and losses.
For many years, the stock market continues to thrive, and it would put a lot of profit in an investor’s pocket. Real estate businesses offered an assurance that an investor would benefit from it. Oil price continues to rise, and the world’s economy is doing so well. There are low-interest rates and cheap credit. Banks can quickly obtain clients to borrow money from them.
Everything is going smooth until the breakout of the COVID-19 pandemic happened. Everything went crumbling and tumbling down. A lot of businesses collapsed in Europe and the US initially. Later on, the rest of the world followed. Investors cards’ got suspended because many banks collapsed as well. The global stock market went down. There was almost no growth.
As a result, people who invested with stocks and properties alone counted not their gains but losses. On the other hand, investors who decided to be proactive by diversifying their portfolios did not fall too hard on the ground. They spread the risks, and the damage was not a full blow. They were still able to continue with trading.
It is now evident that a trader must not focus on just a single or few asset classes because we never know what can happen in the economy and the markets.
The currency asset class
Currency has these two characteristics so that we can identify it as an asset class. First, a person can incur an interest rate differential between one currency and another. Second, a person can gain profit when the exchange rate changes.
For example, a trader can profit from the difference in the interest rate of one country and another. To do this, a trader can buy a currency with a better interest rate and selling the currency with a lower interest rate.
Concluding on currency as an asset class
Traders who include the forex asset class in their portfolio may be considered wise and proactive. It is recommended that a trader must not solely trade on stocks alone so assets are secured from economic downturns that some events and phenomenons can create. Let’s take the COVID-19 pandemic as an example. No one predicted it, but it did happen. No one knew it would become this widespread, but it did.
The forex asset class is independent and unique from the rest of the traditional asset classes like stocks and properties. These traditional ones, such as commodities, properties, and equities, are all interconnected. They tend to move all at the same time. Say, when the global economy has cheap credit, there is a rise. They also tend to fall all at the same time during an economic downturn.
