Joseph Daniel J Allen

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What is diversification across asset classes?

Diversification spreads investments across different assets—such as forex, commodities, indices, and stocks—to reduce overall risk. For example, a trader holding EUR/USD, gold, and S&P 500 CFDs is less exposed to one market shock than if all trades were in forex. Diversification reduces drawdowns from correlated losses and stabilizes portfolio returns. However, over-diversification can dilute focus and performance. The key is balancing uncorrelated assets that respond differently to economic conditions. In practice, diversification helps traders weather unexpected market events.