An essential strategy for long-term investment success and to lower the impact of market declines on your portfolio is through diversification.
Diversification is the process of spreading your money across a variety of investments that don’t all behave the same way during periods of market volatility. By not limiting your exposure to any one asset class, industry or geography, you can help lower the overall risk of your portfolio to a range that you’re comfortable with.
A well-diversified portfolio consists of investments in:
- different types of asset classes (stocks, bonds, cash)
- a variety of industries
- different-sized companies, and
- diverse geographic regions and currencies
What is an asset class?
An asset class is a grouping of investments. There are three main asset classes: equities (or stocks), bonds (or fixed income) and cash.
Each asset class has different investment characteristics, for example:
- the level of risk
- the potential for returns
- variations in performance in
- different market conditions
What’s hot can quickly become what’s not
Concentrating your investments in a few hot stocks or sectors, also known as “swinging for the fences,” can be exhilarating. But is it sustainable over time? Historically, the winner in one year – the security, country, asset class or sector that outperformed its peers – is often not the winner the following year. It is almost impossible to predict winners consistently, and when they invariably falter this can lead to a potential decline in your wealth over time.
A well-diversified portfolio can help protect your investments during market downturns while potentially generating higher overall returns. Review your investments to ensure you have a portfolio in place that takes advantage of diversification to help you achieve your long-term financial goals. If you are working with an advisor, reach out to them if you have any questions.
How do Scotia Portfolio Solutions protect against market volatility?
We posed this question to Judith Chan, Director, Portfolio Solutions, Scotiabank:
"Diversification is an important consideration when it comes to constructing portfolios both from a stock selection and asset allocation perspective. By investing in different industries and asset classes, we benefit from diversification, which is important from a risk-management standpoint. By investing in a well-diversified portfolio, we are gaining exposure to a variety of asset classes to reduce volatility associated with one asset class, which is important for long-term investment success.
In accordance to their unique investment objectives, each Scotia Portfolio Solution features broad diversification to help reduce volatility, active management to capture selective opportunities and a heavy focus on strategic asset allocation – ensuring each of the five funds has an optimal blend of assets to suit investors with various tolerances to risk."