Diversifying your investment portfolio could improve your potential returns over the long term. Diversification is achieved by investing in a range of asset classes, regions and sectors that suit your investor profile. With the right mix of investments, you can minimize the impact of market fluctuations on your assets’ growth.
Here are some tips for properly diversifying your investments and boosting your returns:
1. Determine your investor profile
To understand what kind of investor you are, you need to ask yourself the following questions:
- What are my investment goals? Do I want to travel, buy a house, plan for retirement?
- How long do I plan to stay invested? Saving for a trip and investing for retirement involve different investment horizons.
- How much tolerance do I have for market fluctuations? Knee-jerk reactions during periods of volatility could lead to making the wrong decisions.
First, you need to set clear goals and be honest with yourself. Then you'll be able to choose the right products for your goals and investor profile.
2. Centralize your investments
A complicated portfolio isn’t necessarily diversified. To get the most out of your investments, your portfolio should hold different types of assets, all of which match your investor profile.
If you deal with multiple advisors at several financial institutions, you run the risk of:
- Investing in products you already have elsewhere, which means your portfolio isn’t actually diversified
- Doubling up on some products, like RRSPs or TFSAs, that have contribution limits and facing penalties as a result
- Paying double the account management fees
Your advisor should have a comprehensive view of your investments so they can make the best recommendations, avoid duplication and ensure you get the right level of diversification.
3. Stick to your strategy
You may have heard advice like “It’s a good time to sell your bonds” or “It’s now or never for buying U.S. stocks!” These tips may prove to be true, but you should always ask yourself whether they help you meet your goals in terms of portfolio diversification.
Adding investments that aren’t aligned with your initial strategy can increase your portfolio’s risk level and drag down your returns. Whenever a “golden opportunity” presents itself, you should ask yourself whether it’s in line with your investment strategy.