Diversify Your Investments
Investment professionals agree that the best strategy for reducing risk and increasing your returns, is to have a portfolio that holds a variety of investments. An effective diversification strategy will employ the four elements listed below:
Vary Your Asset Classes
Asset-class diversity is a basic and important investment strategy: by holding a variety of asset classes, you reduce your dependence on a single market or financial product. If the stock market experiences a slowdown for example, a portfolio containing equities and bonds and money market instruments will not be hit as hard as a portfolio that consists entirely of equities.
Your portfolio should contain the main asset classes, specifically cash assets, fixed-income investments and growth equities in proportion to your investor profile.
Click on your investor profile below to recap the main characteristics of your portfolio and optimum diversification by type of investment (PDF documents).
If you don't know your investor profile or if you think your profile may have changed, redo the Personalized Investment Plan (PIP).
Spread Your Investments Across Several Geographic Regions
Foreign bond and stock markets aren't necessarily in-sync with each other. Canadian and North American markets may, for example, slow down while European, Asian and other markets are in a growth phase. Investing in different foreign markets may be an excellent way of diversifying your holdings and balancing your portfolio.
Two good reasons to have foreign content:
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Canada represents about 4%* of the world's market capitalization
The United States, represents 30%* of world market capitalization, Europe, Africa and Middle East 28%* and the Asia/Pacific region 32%*. If you invest exclusively in Canadian products, you are depriving yourself of potential gains in those global markets. Consider adding some foreign content to your portfolio.
*Information as at October 2010.
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An internationally-diversified portfolio presents lower risk and greater long-term stability
Would you go out right now and invest all your money in a single equity? Of course not, that would be too risky. The same applies to putting all your money into Canadian investments. By adding foreign content to your portfolio, you diversify and you reduce risk.
Spread Your Investments Across Several Industries
By selecting investments in different sectors, you are diversifying and further optimizing your portfolio.
For example, natural resources might be performing well during a particular period, while the tech sector is performing poorly. And then the tables could turn. That is why it is important to diversify your portfolio across several industry sectors. You will benefit from the highs in some sectors, while minimizing your exposure to the lows in others.
Mutual funds are an excellent way to diversify your portfolio because they allow you to hold a number of investments in different sectors.
Once again, the challenge is to find the best asset allocation. You can count on our advisers to suggest winning solutions tailored to your needs.
Choose Different Management Styles
Before we discuss different management styles, it is essential to understand that there is no right or wrong management style. A mix of management styles within a portfolio may complement each other. Depending on the economic cycle, some styles may be more successful. Since it's difficult to predict market movement, it is wise to hold mutual funds that are managed according to different approaches.
In a top-down approach, macro-economic analysis is used to manage funds. The goal is to identify those industries or countries that are likely to offer the best returns. According to this approach, general growth in an industry or country will have a strong impact on equity growth. For instance, the fund manager would advocate buying shares in a company operating in a growth sector or in a growing economy, and not necessarily in a company which, on its own, seems better, but is operating in an unfavourable economic environment.
In the bottom-up approach, the focus is on profitable firms, with little concern for the industries in which they operate. Bottom-up style fund managers believe that a quality firm, regardless of its sector of activity, will generate better long-term returns.
Value-oriented managers look for companies whose share value they believe is not yet representative of the true value of the company. In other words, companies whose potential has not been "discovered" by the market, and whose value has not yet translated into a higher share price. These equities are expected to rise in value due to their competitive position, superior technology or exceptional management team. Managers who prefer this style look for dynamic environments where there are frequent changes in either the economy or the situation of the target companies.
Growth managers are prepared to pay a higher price now for earnings in the future, because the growth outlook for the equity is above average. In contrast with the value approach, the company's growth potential is established, which means that the share price may be high in relation to posted earnings. Managers who favour this approach seek a stable environment in which already successful companies continue to prosper.
This management style is designed to tap into an equity's upward momentum. Momentum managers look for companies that not only post earnings growth, but also a growth rate that exceeds market expectations. They want to take advantage of rising stock prices. This is a particularly aggressive management style, because the equities usually are sold at the least sign of a growth slowdown.