After a while, investors should assess their investments then diversify out of
underperforming assets and instead shift this
investment to other asset
classes that are performing well and are profitable in the long term. Even
then, it is advisable to be vigilant so that no one single asset class is
overweighted as other standard risks are still inherent. Also,
a prolonged
bullish market can result in overweighting one of the different asset classes
which could be ready for a correction. There are a couple of approaches that
an investor can focus on, and these are discussed below.
Diversification and the Relative Value
Investors sometimes find asset returns to be misleading, including veteran
investors. As such, it is advisable to interpret asset returns in relation to the
specific asset class performance. The interpretation should also take into
consideration the risks that this asset class
is exposed to and even the
underlying currency.
When diversifying investments, it is important
to think about diversifying
into asset classes that come with different risk profiles. These should also
be held in a variety of currencies. You should not expect to enjoy the same
outcomes when investing in government bonds and technology stocks.
However, it is recommended to endeavor to understand how each suits the
larger investment objective.
Using such an approach, it will be possible
to benefit more from a small
gain from an asset within a market where the currency is increasing in
value. This is as compared to a large gain from
an asset within a market
where the currency is in decline. As such, huge gains can translate into
losses when the gains are reverted back to the stronger currency. This is the
reason why it is advisable to ensure that proper research and evaluation of
different asset classes are conducted.