Open page one in any finance textbook and you’ll find instructions to diversify your investments. That’s nothing new, we’ve all heard it said, almost ad nauseam, “Don’t put all your eggs on one basket”. It’s really true, “Diversification is an investor’s only free lunch.”

Portfolio diversification is perhaps the most irrefutable investment strategy there is, yet Canadians still tend to overwhelmingly invest in the Canadian stock market, a phenomenon known as home country bias. This approach heightens risk. Concentrating your investments in one country makes you vulnerable to the issues that affect that one country. The answer is to own a globally diversified portfolio, one that spans the world’s developed economies, so that no one geopolitical or economic event can take you down.

Canadians also tend to hold their assets almost exclusively in Canadian dollars. This exposes them to a second risk that diversification can address, currency risk. If you own a global portfolio of securities that are currency-unhedged, you will be holding your wealth in a mix of the world’s major currencies: the U.S. and Canadian dollars, as well as the Pound Sterling, Euro, and Japanese Yen. Such currency diversification can protect you from volatility in the currency markets.

A third way investors heighten their risk is by investing in the stock of too few corporations. Such under-diversification exposes the investor to the risk of financial catastrophe caused by one single point of failure.

We suggest owning a carefully selected portfolio of stocks that consist of equal parts Canadian, American and international stocks, as tracked by the S&P/TSX 500, S&P 500 and MSCI EAFE indexes.

You can own such a global portfolio by investing in Mutual Funds, Private Investment Pools, ETFs (Exchange-traded Funds) and Managed Portfolios. This way you will own stock in a broadly diversified portfolio of the world’s great corporations. Such an investment strategy allows you to invest with confidence and peace of mind, knowing that you are not over-exposed to any one country, currency or investment security.

Three things to watch for:

  1. There are a lot of lousy Mutual Funds, ETFs, Private Investment Pools, and Managed Portfolios being pushed onto unsuspecting investors. Look for proven portfolio managers that are implementing a proven investment strategy. And check to see if these portfolio managers are “eating their own cooking”, that is, they have their own personal money invested alongside investors’.
  2. Beware of over-diversification. There are a lot of Mutual Funds, ETFs and Managed Portfolios that aren’t a carefully and selectively managed portfolio; they just own a little bit of everything. This, actually, is not managed money, and does not properly lower your risk. Make sure you own a carefully structured portfolio of high quality, not high risk, investment securities.
  3. Think carefully about fees. The media will have you believe lower fees are better, and that is true, all things being equal. But all things are not equal. Caveat emptor. You get what you pay for. This is your money that you are handing over to professional portfolio managers – the results they achieve will impact your life! It’s not what it costs that matters most, it’s the solid results you enjoy that matters most.

Call upon us. We can help you wade through the options and select the portfolio that’s right for you to successfully build and secure your wealth.