Of the many ways you can diversify your portfolio, four key strategies emerge: diversifying by geography, by sector, by asset class and by style.
1. By geography
Our Canadian pride might be a powerful advantage during hockey games, but in your portfolio it often pays to look beyond our borders. Because different markets around the world perform differently at different times, when the markets go down in one region or country, the markets somewhere else go up. By investing in a blend of global markets, you can help limit the negative impact of any single area’s market going down. Many Canadians would be surprised to learn that investing only in Canadian companies may actually increase portfolio risk. One reason is that our markets are concentrated in just a few select economic sectors, particularly the resource and financial sectors. When these two sectors don’t perform well, the entire Canadian market feels it.
2. By economic sector
Different sectors of the economy also perform differently over time. Take the telecommunications and automotive sectors as an example. Both sectors may perform well when the markets are strong. When the markets begin to falter, most investors will wait to purchase a new car but will keep their smartphone or landline. So the losses you might experience from your automotive investments may be offset by the performance of your telecommunications investments.
3. By class
The basic building blocks for most diversified investment portfolios are the three major asset classes: equities (like stocks), fixed-income (like bonds and GICs) and cash. Historically, stocks have tended to provide the strongest long-term returns compared to bonds and cash, which don’t fluctuate as much in value over time but tend to offer greater protection of your investment. By diversifying your investments among these three asset classes, you can help balance your risk and reward.
How you balance these three asset classes largely depends on your stage in life:
During your income-earning years, you have more time on your side to allow for the inevitable ups and downs of the stock markets to smooth out. Depending on your individual situation, it may make sense to allocate a larger percentage of your portfolio to stocks, with some bonds for stability and cash to take advantage of new opportunities. As you get closer to retirement, you probably want more assurance that your investments will not lose value. At this stage you might gradually adjust your asset mix to include a larger amount of bonds, while reducing the percentage of stocks. This can provide more stability, while still providing some long-term growth. Once you’ve reached retirement, your focus will probably be on generating income from your investments. You may increase your asset mix in favor of bonds but still keep a percentage of stocks for long-term growth. As Canadians continue to enjoy better health and longer lifespans, you’ll want to ensure some growth so that you don’t outlive your savings.
4. By style
Value, income, growth – there are many different styles of investing, and choosing more than one style can help reduce risk in your portfolio. If value investing provides the strongest returns in one year, income investing could be the better strategy the next year.
Because it’s impossible to predict exactly which of these styles of investing will be “in” or “out” at any given time, it makes sense to diversify to reduce risk. As with other types of diversification, it can help smooth out the returns and mitigate the losses in your portfolio.
Contact me today at 604 981 2306 for a review your portfolio to ensure it’s diversified.