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.
Historical returns refer to five-year rolling returns for a 25-year period ending December 31, 2014
- 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.