Are you putting all your eggs into one basket?
Have you ever wondered why street vendors often sell unrelated products. For example, sunglasses and umbrellas? That may seem weird, doesn’t it? After all, how often would a customer purchase both items at the same time? Street vendors understand that when it is sunny, it is easier to sell sunglasses but not umbrellas and vice versa. By selling both items or through DIVERSIFICATION of its product line, the vendor can reduce the risk of losing money on any given day.
Diversification is a strategy that reduces risk by allocating investments among multiple asset classes, industries and other categories. It intends to enhance performance by investing in various areas where each react differently to the same event. If you diversify your portfolio, your investment performance should be less volatile because losses from some investments are offset by gains in others.
When constructing your RRSP, TFSA, RESP, or RDSP portfolio, you should first understand your investment goals and risk tolerance. Is this for long-term retirement planning or will the investments be used in the next couple of years? How much downside risk can you tolerate? 10%? 20%? Secondly, you have to understand the risk among different investments, then you could decide what to include into your portfolio.
Mutual funds could be a great financial tools to achieve the diversification because each fund would own numerous stocks, bonds and so on. However, just because you are owning several funds do not mean you have a well-diversified portfolio. If all the funds you have are holding similar investments, then it would defeat the purpose. When designing a portfolio with funds, it is important to look at their correlation. Many Canadian funds are heavily concentrated in the financial, resources and energy sectors. In order to achieve superior diversification, you should consider diversifying across the board.Invest in different types of companies, and also different types of industries. The more uncorrelated your investments are, the better.
Diversification can assist investors to manage risk and reduce the volatility of a portfolio. Remember though, regardless of how diversified your portfolio is, risk can never be totally eliminated. You can reduce risk associated with an individual portfolio, but general market risks can impact most investment. The critical point is to find your right balance between risk and return. This will ensure you could reach your financial goals while still able to get a good night sleep.
When it comes to investments, it’s important to build a portfolio that is suitable according to your objective, risk profile and time horizon. If you are looking for investment advice from a trusted professional, you may CLICK HERE to gain a better understanding of our investment planning process.
Disclaimer:
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as investment, financial, legal, accounting or tax advice. Please obtain independent professional advice, in the context of your particular circumstances. This newsletter was written, designed and produced by Samuel Li for the benefit of Samuel who is Advisors at : SamuelConsultant.com is a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities.
Mutual Funds, approved exempt market products and/or exchange traded funds are offered through Investia Financial Services Inc.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. Investia is not liable and/or responsible for any non mutual fund related business and/or services.