Diversification, or how to allocate capital...wisely
The following story sounds like a typical Hollywood script: a young leading man, full of ambition, is looking to make a lot of money. Towards the end of the film, he bets everything he has on a single stock, and strikes it rich! Closing credits. In reality, this little scenario breaks one of the basic rules of investing: never put all your eggs in one basket.
Samyr Mehaïlia: Planificateur financier
Investing all your savings in one place could be a very bad idea: if the investment tanks, you could be stuck with major losses. For example, an all-equity portfolio will probably perform poorly if there is a generalized downturn in the stock markets. Furthermore, because the returns on different asset classes vary from year to year, the class that does best one year may come in last the next year.
Simply adding other types of investments to your portfolio, such as bonds or term deposits, may cause your overall return to improve. In fact, many experts recommend adopting a strategy based on a sound diversification of investments. This approach involves combining a variety of different investments in your portfolio to reduce the overall risk.
A portfolio is well diversified not only when its investments are allocated in different asset classes, but also when they are in different economic sectors, geographical regions and styles of portfolio management. The statistics show that investors do not sufficiently diversify their investments, continuing to invest only locally, or in a single sector.
Be careful though: good diversification does not mean spreading your money around without a specific plan. Your investor profile will actually determine the ideal weighting for each type of investment in your portfolio. This way, your investments will take into account your investment horizon, your tolerance for risk and your financial objectives, among other things.
Diversifying a portfolio is not easy. Many turnkey investment solutions are available to help you with this, and each can be given an ideal weighting based on your investor profile. Your advisor will help you determine the most appropriate asset allocation for your particular situation. This way, you will significantly improve the odds that your retirement script ends like a fairy tale, instead of a horror movie!