DIVERSIFY YOUR INVESTMENTS
TO REDUCE RISK AND SMOOTH OUT RETURNS
Diversification simply means spreading your portfolio across a variety of
assets. Financial markets do not move in concert with one another. Assets
that increase in value may compensate for others that may be standing
still or decreasing. This is how diversification helps to reduce risk and
smooth out returns.
Effective diversification starts with exposure to the three main asset
classes: cash, fixed income and equities. The specific weighting of the
three asset classes in your portfolio will depend on your investor profile
which, in turn, will be determined by your time horizon, comfort with
volatility and investment objectives.
The benefits of a diversified portfolio
A PORTFOLIO COMBINING CASH, FIXED INCOME AND EQUITIES OFFERS GROWTH
POTENTIAL AND LOWER RISK.
Calendar year returns 1998 – 2007.
Cash – Scotia Capital Markets 30-Day T-Bill Index.
Fixed income – S&P/TSX Broad Canadian Bond Market Index.
Equities – S&P/TSX Composite Total Return Index.
Diversified portfolio invested in 5% cash, 35% fixed income,
60% equities.
* A portion of the fixed-income return over the past 10 years is attributable to the significant decline in interest
rates. Historically, a 5% to 7% long-term return is a more reasonable target for fixed income.
The chart above demonstrates that by combining all three asset classes,
you can retain some of the growth potential of equities, yet also enjoy
the stability provided by cash and fixed-income investments.
Asset allocation can help your investments succeed
A STUDY OF 82 LARGE U.S. PENSION
FUNDS CONCLUDED THAT ASSET
ALLOCATION, NOT MARKET TIMING OR
SECURITY SELECTION, WAS RESPONSIBLE
FOR 91.5% OF THE DIFFERENCE IN
PERFORMANCE AMONG THOSE FUNDS.
Remember, at any given time one asset class, region, sector or style may be
leading the market while others lag. But in a diversified portfolio, a decline
in one investment is often offset by growth in other assets. By determining
your investor profile, your advisor can help you choose the right asset
allocation for you.
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