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 | Different Ways You Can Diversify
There are many ways to diversify an investment portfolio, from asset class selection to investment style. Here's a look at different ways you can diversify and the benefits of doing so. | |
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| Diversify Among Asset Classes |
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Asset class diversification means spreading your investments over the three main asset classes -- stocks, bonds and cash investments.
Because the three asset classes often generate different investment returns in different market conditions, holding a mix of asset classes can reduce the short-term investment risk of your portfolio and smooth out portfolio returns from year to year.
Of course, it's also important to diversify within each asset class. By holding different investments in the same asset class, you reduce the risk of your overall portfolio suffering at the hands of a single investment. That's why investment funds such as those available through Manulife GIF & GIF encore -- which holds a number of different fixed income or stock investments in each fund -- are an excellent way to achieve asset class diversification.
| Diversify Globally |
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Geographical diversification involves buying investments based in different world markets. With Canada's share of the world equity market at less than three percent, there are far more investment opportuniites out-of-country than in.
By diversifying globally, you spread out your portfolio over a greater percentage of the world market. You not only gain exposure to potentially higher returns of foreign investment opportunities, you also reduce the overall investment risk of your portfolio as foreign economies, markets and currencies rise and fall in different cycles than Canada's.
| Diversify By Sector |
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Industry sectors tend to perform differently in different market conditions which is why you rarely see one sector as a consistent top or bottom performer during any extended time period. Because there are so many factors that can affect how any single sector will perform, it makes sense to diversify your holdings in more than one sector.
| Diversify By Style |
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When you invest in equity funds, you will notice that each fund has its own investment style. Style is one criteria the fund manager can use when selecting the stocks to hold in the fund.
Two of the most common investment styles are "growth" and "value." The growth style is characterized by managers who favour companies showing earnings growth greater than the growth rate of the overall market. The value style is characterized by managers who buy and hold stocks they believe are overlooked by the market and are, therefore, reasonably priced. "Market" is a combination of the growth and value styles.
Each investment style performs differently, depending on the market conditions. So, a mix of styles in your portfolio is an excellent way to achieve greater portfolio diversification.
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