Sarah Twomey | Desjardins Group
When it comes to building your RSP savings, understanding how diversification works is essential. Simply put, diversification means not putting all your eggs in one basket. By spreading your money across different investment products, you create balance and stability.
The idea is to choose investments that will not fluctuate in price at the same time. In a well-balanced portfolio, a decline in one investment is usually offset by growth in another.
For example, if you decide to invest 100% of your money into an international equity fund, your portfolio would be vulnerable to foreign market fluctuations which could result in big losses. However, if you distribute your money across several types of investments (term savings, bonds, dividend funds, Canadian and foreign equity funds), you increase your chances of getting a good overall return, regardless of market conditions.
Basic triple diversification: In this example, portfolio funds are diversified by investment type, investment term length and the origin of the investment:
- Investment diversification means that your portfolio includes liquidity, fixed-income securities (such as term savings or bonds) and growth securities (equity or equity fund shares). You therefore benefit from investments whose returns and behaviour complement each other.
- Term diversification is useful in the short, medium and long term. If you have $10,000 to invest in term savings, you can spread this amount in equal parts over 5 years: $2,000 in a security for a 1-year term, $2,000 in a 2-year security, etc. This way, you'll receive liquidity from a security that has matured, which you can cash in or reinvest. By renewing for 5-year terms with each maturity, you get a better rate.
- Geographical diversification lets you combine Canadian and foreign securities. You benefit from economic growth, regardless of the continent or country of origin.