Get the right diversification for your portfolio
If your investment portfolio can't withstand volatile financial markets, it may not be diversified enough.
It's a well-worn saying, but "don't put all your eggs in one basket" is particularly well suited to investing. Unfortunately, many investors fail to heed this advice.
"A well thought-out, long-term investment strategy involves not just one or two investments, but a mix of different types of securities," advises Andrew Beer, Manager, Investment Planning, at Investors Group. "We call this asset allocation."
Asset allocation helps protect your investments against downturns, and allows you to tailor the level of risk in your portfolio to your individual needs. In fact, Beer says diversification is the single most important element of investment success.
"Different types of assets do well during different phases of market cycles. With a balanced portfolio, a decline in one asset class may have less effect on your overall investment returns."
Basic steps
There are a few basic steps to formulating an effective asset allocation strategy.
- Define your financial goals and the length of time you have to achieve those goals.
- Consider how comfortable you are with investment risk - for example, will you lose sleep over stock market investments that move up and down in value?
- Create a balanced portfolio with a mix of investments from the major asset classes and markets. A financial advisor can help you choose a portfolio that suits your needs and goals.
- Adjust your portfolio mix as you move through life. For example, when you're younger you may want to concentrate on equities to build wealth. As you approach retirement, you may wish to preserve the wealth you've accumulated through a greater concentration of lower-risk, fixed-income assets.
Diversifying your portfolio
So how do you diversify your portfolio? You should have a mix of investments from different asset categories including cash and cash equivalents, fixed-income and equities. Equities and mutual funds that contain equities experience price fluctuations while fixed-income investments (such as GICs and money market mutual funds) generally produce steady, interest-based returns with little risk. There is a tradeoff, however. The greater the potential for greater long-term gains, the greater the volatility.
The performance of financial markets also varies. While one stock market is on the rise, those in other areas of the world may be in decline. When stock markets are strong, bond markets may be weak. Through the asset allocation process, you can use these variations in performance to your advantage.
Mutual funds are an excellent way to achieve a diversified portfolio. You'll find fund offerings in each asset class, with the added benefits of professional management and diversification among individual securities in each fund.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
© Copyright 2007, Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group.
