If we were to ask you if your investment portfolio is appropriately diversified, what would your answer be? More to the point, how would arrive at your answer?
Most people measure diversification by the number of separate financial investments you hold. Let’s say you have eight different mutual funds in your portfolio. Sounds like a lot. Should cover the landscape, right?
Not so fast. First, ask yourself do you know the names of the companies contained in your mutual funds? If you’re like most people, probably not. And that’s fine. That’s what we’re here for. But let’s get back to that tricky question of diversification. Just because you may hold eight mutual funds doesn’t guarantee that your investments are diversified.
Why? Canada is a relatively small market. There are only so many stocks to choose from. And institutional investors must invest at a scale that makes many smaller cap companies out of bounds. So, if you take a cursory look at the names held in each of your mutual funds, you may be shocked to discover that many of the names are the same. There aren’t an unlimited list of Bank of Montreals or Suncors or Canadian Tires out there.
That’s why it’s so important to select funds that fit into an overall investment plan, balancing sectors and cycles.
All of this came to mind while reading an excellent article entitled: “Six common portfolio tripwires” in The Globe and Mail.
The article exposes many common investment pitfalls. One the author, Terry Cain, calls: “Chasing a ‘hot’ investment,” and he points to the cannabis sector that offers a seductive upside, but an equally perilous downside risk. I like the old adage that by the time you hear about some great investment opportunity, it’s already too late – that much of the value has already been accrued. In other words, the upside potential is much less that the downside risk.
Another great point he raises is: “Being afraid to take a loss.” Not every stock or fund wins under every condition. That’s obvious. What seems less obvious to many is the moment when it makes sense to lock in a loss and transfer the capital to an investment that offers a brighter future.
These are really good questions for any investor to think about. The more awareness you have of these issues, the better your partnership will be with your financial advisors.
Thanks for reading. Feel free to share this with others who are interested in building their knowledge of their investments.
This information has been prepared by Barbara & Eric Chong who are Financial advisor for Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Financial Advisor can open accounts only in the provinces in which they are registered. For more information about Investia, please consult the official website at www.investia.ca.