Surely the primary goal of any investor, after making money, is minimizing risk, which explains why so many investors are turning to exchange traded funds (ETFs). ETFs can help diversify and hedge losses with currencies. Since some currencies benefit from things that hurt markets, says Daniel McNulty at Investopedia.com, they are an ideal tool for adding diversification to a portfolio while helping keep risk at a minimum.
The foreign exchange market is the largest and most liquid market in the world, and it’s also complicated, but ETFs are making it easier to access and understand.
McNulty mentions two types of risk that can exist in one’s portfolio:
- Idiosyncratic risk, which is when the price of an individual stock falls
- Systemic risk, when your overall exposure to the market falls
Reducing idiosyncratic risk is pretty simple: just stay diversified. However, pre-ETF, reducing systemic risk was tricky: you had to open a futures or forex account, and juggle both that and your stocks at the same time. Now there’s plenty of room for everyone in one portfolio, and you can use all that newfound spare time to improve your golf game.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.