In conversations with prospective investors, we aim not just to pitch Streamline Trading but also to provide insights on intelligent investment strategies. Many investors we meet are successful entrepreneurs with already substantial investments in real estate and stocks. They often ask, "Why should I invest in Streamline Trading if my current investments are performing well?" This question opens the door to a vital investment concept: risk-adjusted returns and the power of diversification. Let's delve into why diversifying with Streamline Trading could improve your investment portfolio.
Understanding Risk-Adjusted Returns
At the heart of smart investing is the concept of risk-adjusted returns. This principle suggests that the returns on your investments should be in line with the risks you're taking. Simply put, it's not just about how much you earn, but how much you earn relative to the risks involved. As an exercise, compare the risk and return profiles of a savings account vs an investment in cryptocurrencies.
The Power of Diversification
The most popular 'tool' to improve your risk-adjusted-return profile is diversification. Diversification is often hailed as the "only free lunch in investing," a term popularized by the Nobel Prize-winning economist Harry Markowitz. The idea is to create a portfolio that includes multiple, uncorrelated investments, thereby enhancing your risk-adjusted returns. Ray Dalio, CEO of Bridgewater Associates and a leading figure in the hedge fund world, refers to this as the "holy grail of investing." A diversified portfolio remains stable and less prone to market volatility, reducing your downside risk, without sacrificing return.
The graph above illustrates the principle of diversification in investing, where holding a variety of uncorrelated assets can reduce the risk of the overall portfolio. The key takeaway is that as the correlation between the returns on assets decreases and the number of assets in a portfolio increases, the overall risk (volatility) of the portfolio tends to decrease.
Why Diversification Matters
Many investors mistakenly believe that holding a variety of stocks is sufficient for diversification. However, since stocks are often subject to the same market forces, such as interest rate changes and economic downturns, they can be highly correlated. True diversification involves investing in assets that respond differently to market conditions or are driven by other non-related market conditions. As example; the markets below are influenced by different factors:
- Real Estate: inflation, housing market supply constraints, population growth, interest rates.
- Stock Market: Economical state of a country/markets, interest rates, inflation.
- Agricultural Commodities: acres of land planted with a crop, fertilizer prices, weather conditions.
These factors illustrate that while the real estate and stock markets are both impacted by interest rates and inflation, they share less in common with agricultural commodities. This lack of correlation means that combining different types of investments can provide better diversification than just real estate and stock market investments.
How Streamline Trading can help diversifying
Streamline Trading, with trading strategies that can go both long and short - over a diverse range of markets - driven by different economic factors, presents a viable opportunity for investors exposed primarily to real estate and stocks. Incorporating Streamline Trading into your portfolio can enhance overall stability and lead to healthier risk-adjusted returns. Even if the returns from Streamline Trading are similar to those from the stock market, the added diversification benefits contribute to a more robust investment portfolio .
Interested in knowing more about how Streamline Trading can help you achieve a more stable, risk-adjusted return through diversification? Contact us via the contact form.