The importance ​​​​​​​of diversification

Investing and risk will always have a close relationship, ​​​​​​​and one of the best ways to reduce that risk is diversification.

Share

What is diversification?

Diversification is a risk-management technique that can involve:​​​​​​​

1

Spreading your portfolio across a variety of asset classes instead of focusing on just one

2

Investing in different geographical regions and industry sectors

3

Including companies of different sizes (market capitalization)

4

Combining a variety of investment styles such as value and growth

This is important because financial markets don’t always move harmoniously. Diversification allows for the potential that positive performance of some investments will offset negative performance of others, thereby reducing overall portfolio volatility.

How it’s done

Effectively diversifying a portfolio starts with exposure to all three main asset classes: cash, fixed income and equities. The portion allocated to each of these categories is completely dependent on personal circumstances and investment goals.

Diversification in action

  • Combining all three asset classes in your portfolio can help you benefit from the growth potential of equities and still enjoy the increased stability and lower risk provided by cash and fixed-income investments.
  • The right mix of investments for you depends on your time horizon, comfort with volatility, and personal investment goals.

Remember, at a given time, any 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 may potentially be offset by growth in other assets, allowing for a smoother ride towards achieving your long-term goals. ​​​​​​​

Based on monthly five-year rolling returns from January 1992 to December 2016. Diversified Portfolio assumes annual rebalancing as represented by 2% Cash, 43% Fixed Income, 19% Canadian Equities, 20% U.S. Equities and 16% International Equities. Cash represented by FTSE TMX Canada 30 DAY T-Bill Total Return Index; Fixed Income represented by FTSE TMX Canada Universe Bond Total Return Index; Canadian Equities represented by S&P/TSX Composite Total Return Index; U.S. Equities represented by S&P 500 Total Return Index; International Equities represented by MSCI EAFE Net of Taxes Total Return Index. Index returns include reinvestment of distributions but do not reflect deduction of expenses associated with investments. If such expenses were reflected, returns would be lower. An investment cannot be made directly in an index.

3 reasons to diversify

  1. Unpredictable world events and changes in the economy (interest rates, inflation, etc.) affect each investment differently
  2. Although you cannot eliminate risk completely, diversifying your portfolio can help reduce risk
  3. Diversification can help dampen exposure to market volatility

Talk to your advisor today about the importance of diversification.


This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed. Please consult your advisor and read the prospectus or Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers.

® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2017

Going Global

Why invest abroad?

Read More

Outpacing Inflation

Tips on managing the impact of inflation on your investments.

Read More

Investing better

Learn these key concepts to become a more confident investor

Read More

RBC Retirement Portfolios

A precision-engineered retirement solution

Read More