Page 110 - Ultimate Guide to Currency Trading

FX and Investment Portfolios

One of the ways to consider how much money to invest in a currency-trading account is to look at
your overall investable assets. If your investment port-folio, whether a retail account, 401(k) or IRA, is
invested in more traditional assets such as bonds, stocks, and mutual funds you can view an actively
managed Forex account as a kind of alternative investment. While most of your assets are in the more
traditional investments, you can allocate a certain amount to be in your FX account, and this will act as
a hedge against your overall portfolio's returns.

You might ask, "Why does FX trading act as a hedge against the typical traditional portfolio?"
The answer is that while your bonds and stock move up and down, the returns in an FX account can be
completely uncorrelated to the overall performance of the stock and bond markets. Currencies are
always moving up and down; you can go long or short a currency pair. You can also earn interest in a
trade and have short- and long-term time frames.

If your overall portfolio is invested heavily in stocks, then you can build your currency
portfolio to act as a directional hedge against your large equity exposure. You could
have the entire goal of your currency port-folio to act as a hedge against any downward
movement of the equities in your overall portfolio.

With this in mind, it can be a really good idea to have 10-20 percent of your overall investable
assets in an actively managed currency-trading account. This is the amount that full-service, wealth
management firms such as Merrill Lynch and UBS recommend as a percentage of overall assets that
should be in alternative assets.

Currencies are an asset that is uncorrelated to stocks and bonds, and therefore the returns on
currency trading are not tied to that of the overall market. With this said, you can consider a good
currency strategy as a form of alternative strategy, and the FX pairs as alternative assets. Other
alternative strategies can be to have a position in precious metals such as gold and silver, and
commodities such as oil. You might consider that gold, silver, and oil are priced and traded worldwide
in dollars, and therefore these investments act much like a currency themselves. An investment
portfolio that has a 10-20 percent position in currencies, precious metals, and oil can be very well
diversified with the inclusion of those alternative strategies.

In 1952 Harry Markowitz wrote a paper called "Portfolio Selection." Since then, it has been an
undertaking of most every professional money manager to follow modern portfolio theory. Modern
portfolio theory is the attempt to produce the most portfolio returns for the least risk by maximizing
return and limiting risk by diversifying an investment portfolio to include assets that have uncorrelated
returns with the other assets in the overall portfolio. You can achieve uncorrelated assets by including
both stocks and bonds in your investments. Further, you can achieve diversification by the inclusion of
an alternative asset such as a Forex account, precious metals, and oil. The old adage of "don't put all
of your eggs in one basket" holds true here. Currency trading can be the key to your overall