Remember the saying “don’t put all of your eggs in one basket”? The same piece of advice goes for investments. It’s important when investing to spread out your money across many different investment types. Let’s say you put all your savings into one stock. If it performs well, you’ll make a lot of money, but if it performs poorly, you’ll lose a lot too. Individual stocks may carry more frequent market volatility, which is why many won’t feel comfortable with making stocks their only investment choice. On the contrary, let’s say you put all your savings into more stable investments that gain a relatively minimal amount of interest over time like a GIC or term deposit. Over the years your dollar may be subject to inflation, where the same dollar could buy fewer goods and services over time due to price inflation. Every investment will likely experience ups and downs throughout your lifetime. Therefore, appropriate asset allocation and diversification will help offset volatility.
What is Diversification?
Diversification is used to reduce the impact of low performance of any one security on your entire portfolio by combining a variety of investment types within a portfolio. At some point in your investment journey, you’ve probably heard the terms equities, fixed income, hedge funds, private equity, or alternative assets. These are investment types that you can spread your money across to help balance out volatility. As a measure to protect your investments during your investment journey, investors diversify portfolios using these investment types to improve your returns. Diversification is one of the most common techniques that can help you balance your asset allocation and reach your long-term financial goals.
How to Achieve a Diversified Portfolio
Diversifying your portfolio isn’t as complicated as it sounds. There are several steps you can take to create a diversified portfolio with your Wealth Advisor. Here are five types of investments that can be used for diversification:
- Asset Class: An asset class is a group of securities that could be in your financial portfolio that share similar return profiles. These assets typically include cash, fixed income, stocks, real estate, commodities, futures, ETFs, and even cryptocurrency. These assets can be used to balance each other out in bear and bull markets and provide some money both inside and outside of the market.
- Country: Foreign stocks are just one way to diversify your stock portfolio. Stocks from other countries tend to perform differently and typically balance out a domestic-heavy stock portfolio. Canada represents less than 5% of the global market, and its market is mostly concentrated in energy, finance and materials. By going global, you gain a greater opportunity to diversify into other markets and sectors. You may look at adding stocks from international stock markets, so that you can achieve greater stability in global markets where one country might be facing tougher times than others.
- Company: Individual stocks can give investors a sense of connection to a specific industry or company, but these stocks are more prone to volatility. However, there are stocks that tend to perform well over time and working with an advisor what might be best suited to your needs.
- Industry Sector: In additaion to investing in different assets, countries and companies, it is a best practice to invest in multiple different industry sectors too. Generally, there are 11 sectors within the Global Industry Classification Standard (GICS), which can be broken down into 24 industry groups, 68 industries, and 157 sub-industries. Some of these industries include tech, financial services, healthcare, and precious metals, among others. Diversifying by industry sector helps protect you from factors affecting a specific industry or companies within an industry.
- Investment Style: Diversifying your investment style is yet another way to diversify your portfolio. Growth and value are two fundamental approaches. Both can take you in the direction of better stock portfolio performance. However, both are two schools of investing that take different approaches. Growth stocks tend to outperform the overall market over time because of their growth potential. Value stocks on the other hand, are stocks that may be temporarily trading below what they are worth and will likely provide increased returns.
Creating a Plan for Any Kind of Market
While there is no silver bullet, the key to investing is establishing an investment strategy that evens out potential losses in a bear market, a time when the market experiences prolonged price declines, and earns in a bull market, when prices are rising or are expected to rise.
Furthermore, money for your short-term goals and long-term goals should be invested differently. The longer your time frame, the more flexible you can be with your investment capital and investment portfolio. The shorter your investment timeframe, the more pointed you want to be during that investment window.
Diversification is a key technique used to weather ups and downs, as well as bear and bull markets. Balancing your investment portfolio is all about maintaining appropriate asset allocation to see you through lows and benefit from highs. In any case, you can avoid costly mistakes by adopting an investment strategy that you can handle and feel comfortable with.
Diversify Your Portfolio, Not Your Advisors
Diversifying your investments doesn’t mean you need to diversify the advice you receive or the financial institutions you bank with. Consider consolidating your investment accounts with one advisor. There are many advantages to this, including helping you save time, money and fees during tax season, but also to ensure that your investment plan is pointed and straight-forward.
Having one advisor results in a more in depth understanding of your current situation, and a well-informed view to help you develop a customized plan that reflects your objectives and matches your goals. The most valuable advice comes from a certified Wealth Management expert with the accreditations you can trust to help you through the process.
Get Wealth Management Advice from a Trusted Advisor
Building a strong and well-diversified portfolio that’s ready for the long haul takes commitment and planning. When done with a Wealth Management expert, you can ensure you’re spread out across many investment types without being spread too much in one area or too thin in another. Talk to an advisor to discover how you can diversify your investment portfolio.
Mutual funds, other securities and securities related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Mutual funds and related financial planning services are offered through Credential Asset Management Inc. Financial planning services are available only from advisors who hold financial planning accreditation from applicable regulatory authorities. Credential Securities is a registered mark owned by Aviso Wealth Inc.