3 ways diversification can help protect your portfolio
By Alex Jones, Director and Investment Counselor 23 December 2019 2 min read
Stocks and bonds are volatile by nature. Price changes and short-term fluctuations are impacted by a variety of factors — evolving business conditions, investor sentiment and political whims — and they can be hard to ignore, even with a well-planned long-term wealth creation strategy.
Investing requires patience. Even if you’re retiring next week, you will likely need your money to last for two, three or even four decades. Luckily, maintaining the long view has historically paid off for investors. In fact, when measured over a decade, global stock markets have never lost money.
In addition to taking a long-term approach, diversification is an important strategy in minimizing risk. Having your capital invested across multiple asset classes, countries and sectors will better protect your portfolio from sharp volatility and help capture growth wherever — and whenever — it occurs. Diversification will protect you from the sharp volatility of the market, while helping to grow your money even in difficult times.
1. Diversify across assets
Your level of diversification will depend on your investing goals and how much risk you are willing to accept. While the idea of getting in early on an investment and watching it double or triple in value is enticing, it could just as easily go the other way. You may be able to live with that for a small position in a single stock, but that would be disastrous for your retirement fund or grandchildren’s Registered Education Savings Plan (RESP). If you’re looking to protect yourself from stock market volatility, then additional diversification in real estate, bonds and cash can protect your whole portfolio from that catastrophe.
2. Diversify across markets
Many Canadians have a major part of their portfolio invested in Canada. You pay your taxes here, you earn your income here and it feels good to invest where you live — you are Canadian. However, Canada makes up only three percent of the global market and we live in a globally connected world. An investor who focuses only in their home country misses the benefits of global diversification. Moving some of your investments into international markets can help you capture higher returns in growing markets and minimize the impact when domestic industries are challenged.
3. Diversify across sectors
Most people are comfortable investing in what they know — this is usually the business or industry where you have spent your career. This is a comfortable choice, but it adds risk to your portfolio. Consider investing across different sectors and spreading your investments between established and emerging industries. Kodak would have been a blue chip investment 40 years ago, but your portfolio would not have held up if all your money was invested in the camera and film industry.