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Get equities in your equation – putting diversification to work

Stock markets around the world have been volatile in the last few years. If your portfolio has lost some of its luster because of this, you may be seeking ways to protect yourself from investment losses by moving more of your money into ‘safer’ investments.

It can be appealing to look for the stability of fixed-income investments like bonds, mortgages, T-bills, Guaranteed Income Certificates (GICs), or mutual funds investing in those types of securities. But market experts agree, and decades of investment experience has proven, that a diversified investment portfolio through effective asset allocation is the best way for investors to achieve the long-term goals of their overall financial plan – and equities (including equity mutual funds) play a key role in achieving the highest returns for a given level of risk.

Here’s how an appropriately diversified investment portfolio can help buffer market turbulence:

  • Diversification: A diversified portfolio encompasses all asset classes, which can offset the downward movement of one class with the upward movement of another.
  • Asset allocation: Because asset performance is constantly changing and the asset allocation process is dynamic and fluid, investors are best served by covering all the bases at any given time.
  • Asset mix: Studies have shown that asset allocation is the major driver in investment returns. In fact, as much as 90 per cent of portfolio variability can be attributed to the choice of asset types.
  • Long-term growth: Since 1950, fixed-income investments have generally reduced investment risk but have also lowered long-term growth. Over the same period, Canadian equities have produced the necessary asset growth to achieve long-term investment objectives1
  • Risk tolerance: The amount of risk in your portfolio depends on your personal tolerance for risk and your time horizon. For example, if you’re close to retirement, you might want to reduce risk to protect a portion of your investments from inevitable periods of market volatility.

Diversification works. And knowing the basics can help you understand and take advantage of the risk that may be in your portfolio. Get the asset allocation help you need from your professional advisor.

Date reviewed: January 27, 2015

1S&P TSX Composite vs DEX Long Term Efficient Frontiers (1950-2010)

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.