Diversification means spreading your portfolio across a variety of assets. Financial markets do not move in concert. Assets that increase in value can help compensate for others that are not changing or decreasing. This is how diversification helps to reduce risk and smooth out returns.
Effective diversification starts with exposure to the three main asset classes: cash, fixed income and equities. The specific weighting of each of these three asset classes in your portfolio will depend on your investor profile, which is determined by your time horizon, comfort with volatility and investment objectives.
The chart below demonstrates that by choosing a diversified portfolio that includes all three asset classes, you are better positioned to experience the growth potential of equities while limiting your exposure to market volatility.
Past performance is not a guarantee of future results. As of Dec 31, 2016. Rolling 5-year returns over past 25 years starting January 1992. Five-year rolling returns refer to periods of 60 consecutive months with new periods beginning on the first day of each month. Source: Diversified Portfolio assumes annual rebalancing as represented by 2% Cash, 43% Fixed Income, 19% Canadian Equities, 20% U.S. Equities and 16% International Equities. Cash represented by FTSE TMX Canada 30 DAY T-Bill Total Return Index; Fixed Income represented by FTSE TMX Canada Universe Bond Total Return Index; Canadian Equities represented by S&P/TSX Composite Total Return Index; U.S. Equities represented by S&P 500 Total Return Index; International Equities represented by MSCI EAFE Net of Taxes Total Return Index. Index returns do not reflect deduction of expenses associated with investments. If such expenses were reflected, returns would be lower. An investment cannot be made directly in an index.
RBC Global Asset Management Inc. (RBC GAM) and its affiliates make no warranties, express or implied, as to accuracy or completeness of this information. RBC Funds are offered by RBC GAM and distributed by Royal Mutual Funds Inc., a licensed financial services firm in the province of Quebec. ®Registered trademark of Royal Bank of Canada. RBC Global Asset Management is a registered trademark of Royal Bank of Canada. Used under license. ©RBC Global Asset Management Inc. 2017.
- Combining all three asset classes in your portfolio can help you benefit from the growth potential of equities and still enjoy the increased stability and lower risk provided by cash and fixed-income investments.
- The right mix of investments for you depends on your time horizon, comfort with volatility, and personal investment goals.
Remember, at a given time, any one asset class, region, sector or style may be leading the market while others lag. But in a diversified portfolio, a decline in one investment is typically offset by growth in other assets. By determining your investor profile, your advisor can help you choose the right asset mix for you.
If you prefer a single investment solution that has built-in diversification by asset class and geography, we offer a wide range of RBC Portfolio Solutions appropriate for investors with a very conservative to more aggressive profile that is actively and professionally managed.