Forex vs. Portfolios

If you are seeking an opportunity to net significant profits through your investments, should you invest in the Forex marketplace or create a portfolio of holdings?

When it comes to investing, diversification is a concept that should be applied to any smart investor’s holdings. After all, the “don’t put all of your eggs in one basket” mantra has been repeated for decades – and with good reason. Any investor that is 100% tied into securities, for instance, takes a larger overall risk than an individual who creates checks and balances within his or her financial holdings. That said, many investors today tend to err on the side of over-caution, and in doing so negatively affect the upside potential of their investments by spreading their money too thinly among too many investment vehicles. Imagine someone who invests in certificates of deposits or savings bonds due to the relative security afforded by these options. Historically, these types of investments would barely, if at all, keep up with the pace of inflation. Is this really a safe or lucrative investment, then?

Those interested in creating a portfolio of investments should include investment options that actually generate a significant return, while balancing the risk factor appropriately. In this piece, we will examine the opportunities within the Forex marketplace, as well as the general security and performance potential of creating a diverse portfolio of investments.

To begin with, let us define an investment portfolio. A portfolio generally refers to a collection of assets and holdings that are managed by either an individual investor or an investment manager. As an investment portfolio increases in size and scope, many investors will seek some type of management guidance – from a simple online tutorial or trading platform, to a fully managed, private client-type of experience. Regardless of the management style, portfolios are often comprised of stocks, cash accounts or money market accounts, certificates of deposit, real estate, bonds, and precious metals. This diversification is, on paper at least, a good thing. Putting all of your money in one type of investment is contrary to what highly successful investors have been doing for centuries. However, if you are considering creating an investment portfolio, you’ll want to ensure that the overall balance of investments has been formulated to deliver an optimal balance between ROI and risk-tolerance. 

Forex is another investment option to consider. Forex refers to trading currency pairs through a specialised marketplace. To do so, an investor will generally partner with a broker who places actual currency trades through a specialised system. Currency is bought and sold in pairs, with the investor playing the valuation of one investment off against the other to net a profit. In the meantime, the broker charges a small premium on the price of the currency, which then creates a potentially profitable situation for both parties involved. With Forex trading, there are several inherent features that make it ideally suited for those who like to trade quickly and often. Moreover, it can be easily managed by a single investor without much oversight from the broker. Forex is certainly a dynamic and powerful investment option, but should it take the place of a traditional portfolio of investments? The answer is – no. Forex is incredibly lucrative, and it should be used in conjunction with a portfolio of other investments to yield a balanced investment portfolio, but most investors will be better off creating a portfolio of securities for long-term growth, tempered by Forex trades for short-term gains. 

Here are some of the benefits of investing in Forex that translate into potentially better overall returns for your investment portfolio:

  • Volatility: Many investors think that volatility is a bad thing, and to the untrained eye it can be. However, rapid price fluctuations in the currency markets enable short-term traders to make quick profits and then set up for the next lucrative trade.
  • Leverage: Most trading bodies allow for leverage when purchasing stocks, but it is usually limited to a 2:1 or 4:1 ratio. Unlike these conservative guidelines, Forex traders are often able to trade using 10:1, 25:1, or even 50:1 leverage ratios. This enables a trader without much upfront capital to begin building equity quickly.
  • Trading hours: While the major stock markets still operate within tightly defined, minimalistic trading hours, the Forex marketplace is active beginning Sunday evening (Eastern Standard Time), and continues to operate around the clock until Friday evening. This real-time trading ability enables investors to react quickly to market news or global influencers that can affect the value of a specific currency.

When comparing the upside potential and risk levels associated with traditional portfolios – those generally comprised of stocks, bonds, and other long-term holdings - with the benefits of trading in the Forex marketplace, it is common to feel that the comparison is an “apples to oranges” situation. In fact, it is! Forex should never take the place of a balanced investment portfolio, but no portfolio should be considered complete without a Forex account. The quick gains and high leverage ratios inherent to currency trading present the ideal complement to the long-term stability and measured growth of a traditional stock portfolio. Combine the two and you’ll create a winning strategy for success.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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