You put a lot of thought into your initial investment strategy. With your advisor's help, you chose investments that fit with your investor profile and objectives. But you've made some changes since then. They don't seem like much, really: a great opportunity comes up, you buy a stock, you sell another one...Can these changes impact your diversification strategy?
Here are 5 questions to help you determine if your portfolio is still well diversified.
1. Did you choose your investments based on your investor profile?
Knowing who you are as an investor is the foundation of your strategy. If you have an advisor, they'll help you redefine your profile and determine which investment products are right for you. For each of your goals, you'll be able to define:
- Your objective
Why are you investing your money? Are you planning a trip? Buying a home? Saving for retirement?
- Your investment horizon
How long are you investing for? Saving up for a trip and saving for retirement require two different investment strategies.
- Your risk tolerance
How comfortable are you with market fluctuations? Knowing how much risk you can tolerate is a key consideration in choosing the right investment products for you. It can stop you from reacting too quickly and making decisions that will have a negative impact on your overall strategy.
Your profile will also help you determine your formula, i.e., how to allocate your investments among various asset classes (e.g., 60% fixed income and 40% equity).
2. Do your investments complement one another?
One of the main objectives of diversification is to limit your risk by balancing out the highs and lows. Because you don't want your various investments to all fluctuate in the same direction at the same time, you might select different maturity dates to weather interest rate changes, or choose complementary sectors.
3. How comfortable are you with changes in your portfolio's value?
Consider investing in different geographic regions and economic sectors. This investment strategy can reduce the impact of market fluctuations on your investment growth and improve your long-term return potential. Not all markets fluctuate in the same direction. The Canadian market could go down, as global markets go up, or vice-versa.
4. Do you hold a lot of investment products?
When it comes to portfolios, complexity isn't necessarily an indicator of good diversification. Having lots of different investments could limit the effectiveness of your overall strategy. You might also be spreading yourself too thin. Heard about a new product or investment opportunity? Take the time to determine if it fits with your objectives. Make sure all your investment products are aligned with your strategy.
5. Do you have a good overview of your investments?
If you invest with several financial institutions (e.g., for your RRSP or TFSA), stay on top of your contribution limits, because you might be subject to penalties. Having just one advisor who helps you define your investment strategy makes it easier for you to manage your investment products and ensures you aren't investing in the same product twice.