The
volatility in the stock market has ebbed significantly over the past three months as the impression of stability in the global economy starts to
gain traction with investors. While markets around the
world continue their climb towards the highs of years past, investors
must always remember the number one rule for successful investing:
diversification.
Studies have shown that approximately 90 per cent of an investor’s return comes
from the right asset allocation. Thus if you have the right mix of
assets diversified geographically, by sector of the market and by
class, you should have the right recipe for a profitable portfolio that
can weather any storm.
During the past seven weeks, the North American stock markets have rallied
more than 25 per cent above their March 9 lows — an enormous move
higher. Just as it was important to be diversified in the areas of
the market that would best protect an investor on the way down, it is
just as important to make sure an investor is diversified on the way up
as well. As the market continues to rise, the risk of some sort of
pullback in the equity market increases. As long as an individual
remains diversified, they will have better protection against any small
or large drop in the stock market than an investor who does not have
the right mix of assets in their portfolio.
However, diversification does not simply mean investors should go out and purchase as
many different investments as possible. If they
were to do this they would be over-diversified, which can work against
them. Diversification means purchasing good quality investments in
areas of the market that you feel will outperform during the good times
and protect you when times are tough. You don’t want all your eggs in
one basket, but you also don’t want too many unsuccessful baskets
either. The right mix of diversified assets is the key to a successful
portfolio.
The size of your portfolio, your objectives and tolerance for risk will
dictate the types of investments that will make up your diversified
portfolio. For those investors looking for growth, I would look to
diversify into three sectors of the market: financial companies, oil
companies and companies involved with infrastructure building. If you
are a mutual fund investor, you should choose companies that have
components of these sectors in your funds. As always, you want to
diversify geographically as well. Thus, investors should make sure that
they own an international or U.S. component in their portfolios
as well, even though Canada may currently be outperforming the rest of
the world. Lastly, if you are more of a conservative investor or if
income is your objective, you will want to look at fixed income investments. Corporate or government bonds can be a great
stabilizing force in any diversified portfolio.
Being diversified is one of the most important rules to remember when
creating a portfolio. Diversifying into key areas of the market is of
the utmost importance when you are looking to grow your wealth. If you
are an investor that is looking for protection and income, there are
many ways to diversify your money with a range of fixed income products as well. Always remember that diversification does not
mean buying as many investments in as many areas as possible. Being
over-diversified can cause a portfolio to go nowhere over time.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
