Global Macro Investing and the Benefits of Multiple Asset Classes

If you have been into investing for long you have likely heard that diversification is the only true free lunch. On the other hand if you have gone to a financial planer and then let them diversify your funds you have likely been disappointed. In fact if you had been diversified the way most planners do it you would still have negative returns after the last ten years. Lucky for you diversification is still a very useful tool and one that you can use to your advantage. You just need to learn the correct way to do it.

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.

When you are properly diversified you will be invested in all liquid asset classes and sometimes even a few that are relatively illiquid investments. In addition to being in several asset classes you will also be in several different types of strategies with multiple time horizons. Global macro traders have known for years that if you dont cast your net wide you will have a hard time performing in all market types. If you just have a bunch of global stocks then all your investments are extremely correlated which means when a few drop the rest drop. One of our goals as investors is to avoid that.

Global macro investors diversify into several different asset classes. Some of the more common ones are domestic stocks, foreign stocks, Treasury bonds, investment grade corporate bonds, junk bonds, foreign government bonds, foreign corporate bonds, commodities, real estate, and currencies. Some people will go as far as to trade in art and other collectibles as they are uncorrelated to regular investments and therefore add benefit if you have expertise in that area.

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.

As previously mentioned we can diversify not only by investing in several asset classes but also by investing in strategies with different time horizons. There are successful long term and short term trading funds and if you invest in both you are even more diversified as their returns depend on different factors.

If you diversify wide and deep your investment returns will be far more consistent and in most years will be better off then the standard stock and bond mix that so many so called professionals push you into. There is no guarantee that you will make money every day, month, or even year but by following these concepts you can really improve your risk adjusted returns.

If you prefer to do all of this on your own then you will be well served to learn how to build or just buy several good models so that you can more easily track several asset classes. For instance you will want a few models for the stock market, a few for commodities, etc. The more efficient you set up the process the better your returns will be as you will miss less great risk to reward opportunities.

Article Source: FxTradingStock.com

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.

by: Paul Kovner

Total views: 66 Word Count: 591 Date: Thu, 9 Apr 2009

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