If we have read at least some basics about investing, there’s one cardinal rule that we could hear the most often. In this case, it is not advisable to put all of our “eggs” in one basket. The idea is to put our fund into multiple types of investments. Sometimes, one of them goes down, while others could go up. This should give us less volatile or more consistent returns over time. Investment options that we hear may include bonds and stocks. In this case, we should be able to cover any possible means of gathering wealth. In a traditional sense, diversification should work 99 percent of the time. However, there’s nothing that could provide us with repeated success, so it is important to be prepared of failures. There are different concepts of diversifications, as an example, we should have a balance between buy and sell orders. There should be some amount of interconnectedness between these investment methods. We should also be able to systematically leverage our investment methods to properly enhance results.
In a perfectly balanced market, all buying and selling transactions are properly completed. However, such a market is quite rare, especially if it is highly regulated. In this case, if nobody wants our investment methods, it is important for us to lower the price. This should allow the market to retain much of its balance. However, when demands dry up, nobody want our investments options. In this case, we won’t be able to sell our products. Regardless of what happen, we should seek to complete the transaction, although our investment method could have much reduced values at the time. Such a situation could happen when the market crashes. It means that nobody is buying and everyone is trying to sell their investment items at once. In this situation, prices will fall very rapidly, especially because there is an imbalance in the market. However, with diversification, we should be able to reduce the effects of volatility in the imbalanced market.
If we are buying bonds in a specific country, we would be affected by local factors, such as regulation, economic condition, political climate and interest rates. Local stocks could also be affected by these factors. By the law of arbitrage and compounding, higher interest rates could directly affect bonds. However, our risk will be much reduced if we are buying stocks from different countries. Some economies will bust and other will still boom. This is especially true during the 2009 economic crisis, when the European economy slowed down, while Asian economy continued to thrive.
In the modern market, the world economies are highly coupled that difficulty in one region will affect others. However, we should still be able to find some countries that fare quite well during a global economic crisis. This should give us an opportunity to diversify our stocks and bonds options. Any investor should be aware that it is very rare for them to find a market where selling and buying forces are properly balanced.
