5 must-knows about diversification in investing
Unlock new opportunities and minimize losses with this smart investment strategy.
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Just about any investment expert will tell you that diversifying your assets is crucial for long-term growth. Why is this? Let’s walk through five key benefits of holding a mixed bag of securities.
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1. It helps you offset losses from market cycles
When the news sparks fear in investors and no one is in a mood to spend, stocks in sectors like consumer staples and healthcare tend to rise in value, as do term deposits and gold. Many view these types of assets as “safe havens” during financial uncertainty.
But when the market isn’t spooked by troubling headlines and people feel comfortable enough to open their wallets, stocks in sectors like consumer discretionary, financials and technology tend to do well instead.
How do you keep growing your money amidst the market’s ups and downs? Don’t trust one sector, industry or asset to take your portfolio to the moon. Spread your funds across a variety of investments, so that strong performance in some areas can offset underperformance in others.
Look for an investment platform like CIBC Investor’s Edge that lets you access a broad range of assets like stocks, ETFs, options, mutual funds, GICs, fixed income securities (like bonds), precious metals, IPOs, CDRs and structured notes.
2. You can potentially reap higher returns
Still licking your wounds from failing to invest in Microsoft in the 1980’s or not buying bitcoin before it hit six figures?
Diversifying your investments doesn’t guarantee that you’ll have a stake in the next big thing to hit the market, but spreading money across many companies and assets makes it more likely that you’ll benefit from favourable developments within specific businesses.
Of course, diversification still comes with risk. As with any investment strategy, you could lose money. But, if your portfolio reflects the broader economy rather than just a small slice of it, the odds of profiting are in your favour.
Look at the S&P 500, which provides a solid snapshot of the overall US market. Over the last 50 years, it has returned more than 8% (with dividends reinvested, adjusted for inflation). Over the last decade, the S&P/TSX Composite has returned around 9%.
In the end, investors who hold on through all the breakthroughs and burnouts have historically come out ahead.
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3. Access more opportunities with diversification
It’s tough to keep up with everything that goes on in the business world. New ideas result in new products; leaders come and go; acquisitions, buyouts and bankruptcies happen—all of which can impact the value of your investments.
Unless you have the time and know-how to track all of these changes for every company out there, you’ll have a tough time knowing when a profitable opportunity is around the corner.
By casting a wide net, you increase the chance of reeling in a good investment you might have otherwise overlooked had you been focused on a narrow subset of businesses or industries.
4. Even focused investments can be diversified
Have a hunch that a sector or industry will experience an upswing? You don’t have to choose between diversification and pursuing a targeted investment strategy.
Even if you focus your investments on a particular asset class, you can still diversify to offset your losses and maximize your gains.
For instance, if you want to invest in technology stocks, consider spreading your funds across multiple companies, not just one. You may also want to look beyond the major players to discover companies that provide related products or services like cloud service providers or silicon manufacturers.
5. Diversifying is appropriate for any risk level
In the investment world, taking on more risk usually translates into one of two options: high gains or sharp losses.
Some find the gamble worth it, while many others prefer to take a safer path. The good news is that diversification is a strategy that can be adapted to any risk level. It’s not a one-size-fits-all formula that’s only useful for the extremely risk averse.
Low-risk investors may want to allocate their money across many investment types to hedge against losses in specific areas. Whereas, high-risk investors may concentrate a greater proportion of their portfolio on specific assets to maximize potential gains, while diversifying the rest of their funds across other investments to limit losses.
Regardless of your investment preferences or financial goals, diversification is a powerful, flexible tool that shouldn’t be overlooked when you’re looking for ways to reinforce and grow your portfolio.
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