Diversify your portfolio in six steps
(NC) One of the oldest pieces of investing advice has to be don't put all your eggs in one basket. In other words, make sure your portfolio is well diversified to protect yourself against the ups and downs of the financial markets. The financial planning experts at Desjardins Group suggest that knowing your investor profile — or risk tolerance — is an important step to building a well-diversified portfolio. Here are six steps that will help you find the right balance of fixed income, equities and cash:
Choose different asset categories: Financial products don't all have the same return and risk characteristics. For example, your portfolio will be more stable if you combine fixed-income securities (term savings, bonds, and market-linked guaranteed investments) and growth securities (mutual funds, shares).
Think about varying your maturity dates: Laddering or staggering the maturity dates of your fixed-income will allow you to regularly have access to cash that you can reinvest and or use to invest in other investment opportunities.
Diversify by economic sector: Activity sectors don't respond the same way to changes in the economy. For example, in times of growth, demand for commodities increases, which favours businesses in this sector. In times of recession, securities tied to basic consumer needs (like groceries, health, etc.) will generally do better than mining securities. It's also important to remember that equities or corporate stocks are the most vulnerable to market fluctuations. Being properly diversified will protect you against this.
Hold international investments: Since Canada represents less than 3% of the world's stock markets, it's important to be open to all growth opportunities. For example, consider purchasing shares in large international and American multinationals that get much of their income from abroad.
Think about growth businesses: While they are a much riskier investment, small and medium-sized businesses have a much higher potential for growth than some multinationals. Investing in a few small cap equities can be interesting over the medium and long term. However, keep your risk aversion level in mind as you may experience some fluctuations.
Learn to recognize management styles: Not all mutual fund managers use the same investment approach. Some look for securities that are trading below their intrinsic value while others prefer to invest in businesses that are well-positioned in a growth sector. The returns of each vary according to the economic context. Blending management styles will give your portfolio more stability in the long term.
For more investing tips, visit Desjardins Group at www.Desjardins.com.
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