If you are looking for a way to add a little more growth to your investment portfolio, and you have the risk tolerance for something a little more exotic, currencies can be an interesting choice.
However, before you get too involved in currency trading, it’s a good idea to carefully consider your choices, as well as understand the risk involved. Currency trading is often thought to be one of the riskier things you can do with your money, so it’s vital that you limit the presence of currency investments to a suitable percentage of your portfolio.
Adding Currency Trading to Your Investment Mix
When you trade on the spot/OTC forex market, you are actually speculating. Currencies don’t actually change hands. Instead, you are risking your money on the idea that you are right about how one currency will move against another. So, if you think that the euro will gain against the US dollar, you would go long on EUR/USD.
If you are right, then you earn money depending on how much higher the euro goes. If you are wrong, though, and the euro falls, you lose money. When you enter and exit a position is quite important, since it can mean big gains or big losses, which are made even bigger by the fact that spot forex trading often involves a great deal of leverage.
Instead of trading on the OTC/spot market, consider other ways to add currencies to your investment portfolio. If you are comfortable with a certain level of risk, you can try trading currency futures contracts or options contracts. These are ofter available as exchange products, and there are several online discount brokerages that offer you the chance to trade futures and options contracts.
Finally, if you want to add currencies to your portfolio, but you want to do it with the least amount of risk, you can invest in a currency ETF. These ETFs follow the movements of different currencies. You can choose emerging market currencies, currencies from developed countries, or a basket of currencies that doesn’t include the US dollar. There are usually a few choices when it comes to currency ETFs.
It’s important to note that, even though currency ETFs are fairly easy to trade, and you can mitigate some of your risk, you are still exposed to currencies, and the forex market is a rather volatile market. You still have a chance of seeing losses when you invest in currency ETFs. But this method can make it a little easier to increase the growth portion of your investment portfolio.
Deciding what works for you should be based on your level of knowledge, as well as on your risk tolerance. If you have a very low financial and emotional risk tolerance, you should probably avoid investing in currencies altogether, and find some other way to add a little more growth to your portfolio. If you can handle the risk, though, it might not be so bad to have between 2% and 8% of your portfolio (whatever is appropriate for you) in currency-related investments.
Tom Drake writes for Financial Highway and MapleMoney. Whenever he’s not working on his online endeavors, he’s either doing his “real job” as a financial analyst or spending time with his two boys.