At some point in your trading career, the constant mantra of “Diversify, diversify, diversify”, must become pretty tiresome. But as the saying goes, cliches become cliches for a reason, most of the time because they’re true.
The concept of diversifying your investment portfolio is pretty simple: don’t put all your funds in one market, because if that market crashes, you lose your entire investment.
However, when you move on from traditional investment to social investment, and Copy Trading in particular, diversification becomes somewhat less straight forward. You may diversify your investments across hundreds of different traders, but if they all invest mainly in EUR/USD, you’ll still end up with very concentrated risk exposure in that market. So what’s a good Copy Trader to do?
Here are 5 tips for diversifying your Copy Trading portfolio:
1. Find investors specializing in different markets – This may seem pretty obvious, but many people neglect to look at the portfolios of the investors they’re coping and only look at the stats. Just like you can diversify your manual trading portfolio among different markets, you can use the People Discovery tool to search for traders who invest in diverse markets.
2. Don’t be afraid to venture out of your comfort zone – While you may not know much about certain markets (after all, we can’t all be experts in everything!), there is a trader for every market at eToro. Copy Trading is an opportunity to venture into markets that you would hesitate to explore on your own, thereby diversifying your portfolio even further, and at the same time you can pick up excellent strategies for investing in these new markets from the investors you’re copying.
3. Use the tools at your disposal to determine market exposure – Both the eToro OpenBook and the WebTrader have tools to help you assess your exposure to each market you’re invested in. On the eToro OpenBook you can go to your portfolio breakdown and use the “Exposure” view to see your investments in each market.
In the WebTrader you can do the same thing by clicking on the “Markets” view in your Open Trades panel. By monitoring your exposure, you can know whether your portfolio is diversified enough or not.
4. Diversify not just markets, but trading styles – Just like you don’t want to invest all your equity in one market, don’t entrust it all to the same trading strategy. Every strategy has its vulnerabilities and if you’re over exposed to that strategy you risk suffering big losses when the strategy fails. It’s a good idea to copy traders with demo money to determine their strategies or simply get in touch with them and ask, before copying so you know whether this trader is good for you portfolio diversity.
5. Be on the lookout for new markets and new traders – At eToro we are constantly adding new markets to our selection, which for you means new diversification options. For example, we just recently added over 100 European stocks. The arrival of new markets gives rise to new successful investors who specialize themselves in these markets, so that’s double the opportunity to diversify. Keep your eyes peeled on the eToro OpenBook for new Markets and new Star Investors.
That’s it for now! I hope these tips will help you build a diversified and sustainable Copy Trading portfolio!
Got any more tips? This is the time to share them, here in the comments below!