Understanding Diversification as a Canadian Investor
As a Canadian investor, understanding diversification is key to achieving success in investing. Diversification involves spreading your investments across different asset classes and sectors, which serves to reduce risk by reducing your exposure to any one particular area. It's important for investors of all levels—from novice traders to experienced professionals—to understand the concept of diversification so that they can make informed decisions about how best to allocate their funds.
When it comes to diversifying an investment portfolio, there are several options available depending on an individual’s risk appetite and goals. For example, some investors may choose to invest solely in stocks or bonds while others might opt for mutual funds or ETFs (exchange-traded funds).
Mutual funds allow you access to a variety of different stocks and bonds within one fund; this helps spread out the risk associated with investing since you're not relying on just one company or sector. ETFs also provide access to multiple assets but are traded like stocks on exchanges throughout the day allowing for more flexibility than most mutual funds when it comes time for buying and selling.
In this article, we’ll discuss the importance of diversifying investments, how to go about doing it, and provide some tips on creating a customized portfolio that suits your needs.
Percentages to Have in Different Things
The percentage of investments allocated to each asset class will vary depending on an individual’s risk appetite, goals, and time horizon. Generally speaking, it's best to divide up your portfolio into four broad categories: stocks (large-cap, mid-cap, small-cap), bonds (corporate and government), cash equivalents (e.g., money market funds and GICs), and alternative investments (e.g., commodities, real estate).
As a general rule of thumb, the higher the risk associated with an asset class, the lower its percentage in your portfolio should be; conversely, low-risk assets such as cash equivalents can have a larger percentage of your portfolio.
For example, a basic 60/40 stock/bond split is typical for those with moderate risk appetites; in this case, the investor would have 60% of their money invested in stocks and 40% invested in bonds. This can be further diversified according to market capitalization (large-cap, mid-cap, and small-cap) or sector (e.g., technology, energy, financial services).
How Mutual Fund Works
A mutual fund is a type of pooled investment vehicle that allows investors to purchase shares in a professionally managed portfolio of stocks, bonds, and other securities. The fund is managed by an investment manager who will select assets based on the fund’s objectives; these can range from growth-oriented (high risk/ reward potential) to income-oriented (lower risk/ reward potential).
When you invest in a mutual fund, each share represents a proportion of the overall portfolio and is priced according to its net asset value (NAV). You can calculate NAV by subtracting the liabilities of funds from the total assets and then divide that figure by the number of shares outstanding.
Mutual funds are a great way to diversify your portfolio, as they allow you access to a variety of different stocks, bonds, and other securities in one investment. This helps spread out the risk associated with investing since you're not relying on just one company or sector.
Conclusion
Understanding diversification is essential for Canadian investors who want to reduce their risk while maximizing returns. It's important to understand the concept of diversification as well as the different asset classes available in order to create a portfolio that is tailored to individual needs.
By spreading out your investments across different asset classes and sectors, you can reduce the risk of investing and increase the likelihood of achieving long-term success.