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Diversification means spreading your portfolio across a variety of assets. Financial markets do not move in concert. Assets that increase in value can help compensate for others that are not changing 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 each of these three asset classes in your portfolio will depend on your investor profile, which is determined by your time horizon, comfort with volatility and investment objectives.

The tool below demonstrates that by choosing a diversified portfolio that includes all three asset classes, you are better positioned to experience the growth potential of equities while limiting your exposure to market volatility.

A diversified portfolio helps you strike the right balance between security and growth

Click to learn about the benefits of each asset type within a portfolio

Cash Equities Fixed income Diversified portfolio Reset
Historical returns refer to five-year rolling returns for a 25-year period ending December 31, 2019

Cash

  • Cash equivalents, like GICs, T-bills and money market funds, generate income that is fully taxable at your marginal tax rate.
  • Adding fixed income and equity, which may receive more favourable tax treatment and offer the potential for relatively higher after-tax returns, can help your portfolio to grow and outpace inflation.

Equities

  • The Canadian stock market is concentrated in the Financial, Energy and Materials sectors.
  • U.S. equities provide broad sector exposure to some of the world's largest companies, many of whom generate a considerable portion of their revenues in global markets.
  • International equities offer diversification and exposure to both developed and emerging opportunities outside North America.
  • Equities receive favourable tax treatment and, historically, have been the only asset class whose returns outpace inflation. Adding fixed income and cash to an equity portfolio helps buffer market volatility.

Fixed income

  • A portfolio consisting only of fixed income investments may not provide the growth and diversification you need.
  • Consider adding an appropriate amount of equities to help, take advantage of lower tax rates on dividends and capital gains and to offset the effects of inflation.

Diversified portfolio

  • 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.
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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 is typically offset by growth in other assets.

Past performance is not a guarantee of future results. Five-year rolling returns refer to periods of 60 consecutive months with new periods beginning on the first day of each month.

Diversified Portfolio assumes annual rebalancing as represented by 45% Fixed Income (includes 2% Cash), 19% Canadian Equities, 20% U.S. Equities, 12% International Equities and 4% Emerging Market 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 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.

Disclosure

This 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. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when provided. Information obtained from third parties is believed to be reliable but RBC GAM and its affiliates assume no responsibility for any errors or omissions or for any loss or damage suffered. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when provided. Information obtained from third parties is believed to be reliable but RBC GAM and its affiliates assume no responsibility for any errors or omissions or for any loss or damage suffered. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information.