Diversifying your investments: 4 common pitfalls

You want to build a portfolio with different types of investments, each with different characteristics, and all of which match your investment profile.

Angela Iermieri | Financial Planner | Desjardins Group

I hear a lot of investment myths in my line of work. Today, I want to shed some light on a topic that comes up often: diversification.

Here are the four most common errors that should be avoided when making investment decisions.

Effective diversification doesn't involve:

1. Investing at several financial institutions
Everyone agrees that you don't want to put all your eggs in the same basket. But diversifying your investments doesn't mean diversifying your financial institutions. Let me explain the difference.

To get the best out of your investments, you want to build a portfolio with different types of investments, each with different characteristics, and all of which match your investment profile.

But 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 RESPs or TFSAs, that have contribution limits and facing penalties as a result.

By putting all your investments together, you'll also avoid paying double the account management fees.

Remember: An advisor who has a clear overview of your investments can make the best recommendations, prevent duplications and ensure that you get the right level of diversification.

2. Purchasing various investment products
What you want is the right number of complementary products, meaning those that aren't related and that won't fluctuate in the same direction during difficult economic periods.

How do you know if your investments are diverse enough? Your portfolio should include investments in several asset classes, economic sectors and geographic regions, and with different management styles. It should also match your objectives, investment horizon and tolerance to market fluctuations.

Combining all of these products effectively increases your chances of maximizing your investments over the next few years.

Remember: Diversifying effectively doesn't mean having tons of investment products.

3. Jumping at every good opportunity
You may have heard advice like "It's a good time to sell your bonds" or "It's now or never for buying American securities!"

These tips may be true, but they don't always apply to you. Will the latest opportunity help you reach your portfolio diversification goals?

Even when good opportunities come up, adding investments that aren't aligned with your initial strategy can increase your portfolio's risk level. And derailing your strategy can compromise your ability to reach your goals.

Remember: Every "good" opportunity should be carefully considered to make sure it's in line with your strategy.

4. Adding all the latest products to your portfolio
Tempted by new products or friends' suggestions? If you're constantly adding to your portfolio without making sure the changes are right for you, managing your portfolio can become a lot more complicated. Not to mention that there may be transaction or management fees related to your decisions.

Remember: When it comes to portfolios, complexity isn't necessarily an indicator of diversity and it doesn't always translate into added value for your investment strategy.

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