Many people are straying away from the fixed percentage rules of diversification. Logically, to say that it should be the same amount in all market types does not make any sense at all. There needs to be some common sense market timing strategy involved in these decisions. If your low risk savings, bonds, and T-bills are not doing a lot in terms of profit and the medium risk areas such as conservative stock holdings are anemic it is not a bad thing in all situations to add a few percentage points of your portfolio to a higher risk category to search for profits. At the same time if the stocks are volatile and have potential for large swings then it is already a higher risk/reward setting and cutting back on the “high risk” portion makes sense.
Since it is still basically accepted that in no situation should the high risk investments make up the majority of your investments, the question remains how do you make the most of that money? If an actively managed portfolio has a value of $50,000 even a relatively aggressive 20% to high risk investment leaves only $10k to use in search of the highest available profits. Even on a solid profitable success that obviously is limiting in total profit that you can achieve.
One area you might look into further if you are not already involved in the market if the Forex currency exchange market. The reason for this area is very simple. While in most risk investing you can only use the cash you have available, a quark of the Forex brokers is they offer leveraged accounts. What this means is you can use your cash to take a position and the broker will stand behind that cash for many times the amount of your actual investment. Amounts of leverage vary from broker to broker but 50x to 100x are common and greater amounts are not difficult to find.
How does the leverage work? If you had $10,000 in your account and find a position based on indicators in a platform such as the MT4 platform from www.alpari.com you feel comfortable with, you take a position on a currency pairing for $1000 of your money. By using the leverage provided by your broker, your actual position you are taking is (at 100x) $100,000. This has allowed you to use a small percentage of the smallest piece of your portfolio to make a move that is worth twice as much as your entire portfolio. The advantages in this are obvious.
What is the down side? The downside is very simple as well, and why caution, common sense, and sound research is essential. If you stand to make profits on a $100,000 investment you also stand to take the loss associated with the $100k. This is why you are using only a percentage of your risk capital, the rest must stay in reserve to cover a potential loss greater than the $1000 initially invested. The proven value of this however is when you make a good call and let it run you can realize very large profits quickly and on a scale that far exceed your individual investment power.
Source Reuben Dickison
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