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Key takeaways:
Diversification is an essential strategy for long-term investment success that can help lower the impact of market declines on your portfolio.
Diversification is the process of spreading your money across a variety of investments, such as stocks, bonds, and cash, that don’t all react the same way during periods of market volatility. By not limiting your investment exposure to any one asset class, industry or geography, you can help lower the impact of market declines on your portfolio to a range that you’re comfortable with.
Often compared to not putting all your eggs in one basket, diversification is a tried-and-tested technique that mixes different types of investments in a portfolio to lower risk.
An asset class is a grouping of investments.
There are three main asset classes: stocks (or equities), 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
Diversification checklist:
A well-diversified portfolio consists of investments in:
different types of asset classes (stocks, bonds, cash)
a variety of industries
investment styles
different-sized companies, and
diverse geographic regions and currencies
By investing in a well-diversified portfolio, you gain exposure to a variety of asset classes. This can help reduce volatility associated with one asset class, which is key for long-term investment success.
Concentrating your investments in a few hot stocks or sectors, also known as “swinging for the fences,” can be exhilarating. But it’s not for everyone and often not 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.
No single asset class is consistently among the top performers, and the best and worst performers can change from one year to the next. A diversified portfolio of different asset classes provides the opportunity to participate in potential gains of each year’s top asset classes while aiming to lessen the negative impact of those at the bottom.
Global investing enhances sector diversification
At less than 5%, Canada represents a tiny portion of the global stock market and is dominated by Financials and Energy sectors. A diversified portfolio that includes exposure to stocks outside of Canada can take advantage of greater sector diversification.
Figure 1: Going global
Source: Morningstar. For illustrative purposes only. Chart demonstrates sector weightings in the respective index. S&P/TSX Composite TR Index and MSCI World Index are as of December 31, 2024.
Get market volatility working for you
Market swings often make it difficult for investors to determine exactly when to invest – especially when trying to invest one lump sum each year. However, with PACs you can invest a fixed-dollar amount at regularly scheduled intervals. By contributing on a regular basis, you take advantage of the market dips by purchasing more mutual fund units when your dollar goes farther and in turn, lowering your average cost. Learn more about PACs.
How do Scotia Portfolio Solutions protect against market volatility?
Diversification can be challenging for individual investors to achieve on their own. Scotia Portfolio Solutions make diversification easy by providing investors with a mix of investments that span different management styles, asset classes, geographies, industries and company sizes in the convenience of a single investment.
Additionally, each Scotia Portfolio Solution is actively managed to help capture selective investment opportunities when they arise and manage risk. They’re available in a variety of asset allocations that combine an optimal blend of asset classes to suit investors with various risk tolerances.
A well-diversified portfolio can help protect your investments during market downturns while potentially generating higher risk-adjusted returns. A Scotia advisor can 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.
