Diversification is the key to a well-balanced investment portfolio; it is perhaps the most important consideration when choosing investments.
Why should you diversify your portfolio?
It is difficult to predict accurately how individual funds or markets will perform over time, but a well-diversified portfolio provides the opportunity to achieve better returns with less risk, helping you reach your long-term retirement savings goals.
When creating your investment portfolio, take the following into consideration: asset class, volatility and fund managers.
Asset class – an investment type that is categorized by the nature of securities held within a mutual/pooled fund. For example, basic asset classes include Money Market, Canadian Equity, U.S. Equity and International Equity. Predicting the next best performing asset class (e.g. Canadian Bond, U.S. Equity) with any degree of success is extremely difficult. To minimize the potential negative impact of putting all of your eggs in one basket, it's important to diversify across a variety of asset classes.
Volatility – is the fluctuation of a funds' performance, up or down, based on it's historical monthly track record. Where available, Manulife discloses the volatility of its funds based on the last three years' worth of performance data. The greater a fund's volatility, the greater the range of returns it has experienced over the time period under consideration. Although a fund's historical volatility is not necessarily an accurate indication of future volatility, it does provide some valuable insight into how risky that fund can be.
Fund managers – typically differentiate themselves through the application of unique investing approaches and/or expertise, otherwise known as fund manager style. Investing with more than one fund manager will allow you to take advantage of the various approaches to investing. Diversifying by fund manager is a good way to ensure you are benefiting from the many possible paths to growing your retirement savings. Specific investing styles typically generate different performance results over time. By holding funds that use different styles, you can reduce the overall volatility of your account.
Achieving a balance between asset class, volatility and fund managers in your investment portfolio, will help you reach your retirement savings goals.