Posted at 8:00 a.m.
Diversification is essential for investors, since it makes it possible to better weather turbulence by stabilizing returns. This is why a mutual fund can contain from 30 to more than 200 securities, as Jean-François G. Labbé, financial planner at Lafond Services Financiers, points out. “A single fund is therefore already diversified,” he notes.
“In a pinch, one fund could do the trick for our entire lives. A single well-constructed solution, which automatically rebalances, does justice to the client in the long term,” said Martin Felton, National Vice-President of National Bank Investments.
However, that does not mean that we should be content with it. “Diversification gives peace of mind,” says Martin Felton. Moreover, “if we choose a single fund and it goes badly, we risk selling at the worst time,” warns Jean-François G. Labbé.
Here are four ways to diversify your funds.
Vary asset classes
There are three main categories of assets: money market securities, fixed income and equities. So-called balanced funds combine at least two of them.
Comprised of short-term debt securities like treasury bills, money market funds are the most conservative option for investors, but they offer minimal returns.
You can also opt for fixed-income investments, which offer a fixed rate of return for a fixed period. “Government bonds, corporate bonds, high-yield bonds, convertible debentures, preferred shares… All of that is fixed income,” Martin Felton lists.
We can finally bet on equity funds. These are considered riskier because their value can change quickly. However, they offer a higher yield. For Jean-François G. Labbé, a portfolio with various asset classes could be made up of six funds – four equity funds and two bond funds – which would reduce risk and provide stability of return.
Invest in different regions
Savers can invest in different regions. They can set up Canadian equity funds, US equity funds or funds from another part of the world.
What is the point of diversifying the regions? “If you own a Canadian equity fund, you don’t benefit from the growth of the American market or the strength of international markets,” explains Angela Iermieri, financial planner at Desjardins.
On the international level, we can also bet on emerging markets.
Focus on more than one sector
To avoid the prices of stocks in a portfolio all varying at the same time, one can also vary the sectors of activity, which range from financial services to health care and energy.
“We will not put all our actions in the technology sector, because if there is a correction in this area, everything will go down”, illustrates Angela Iermieri. By accumulating the sectors, one should compensate for the variation in performance of the other.
Vary management styles
The last possible diversification concerns management style. “We could have a fund with value-oriented management, securities of already established companies that have reached their full potential, and growth investments, securities of small companies that are booming,” explains Angela Iermieri. Again, diversification helps to mitigate risk and increase potential return.