We often hear that you need to have a diversified investment portfolio, but what does that really mean? For some, that means owning shares in different types of businesses, either diversifying by industry or by a company’s place in the economic cycle, i.e. some that do well in recession and some that do well in times of growth.
A more balanced, diversified portfolio requires different types of investments to balance risk and return. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-term financial goals. No particular investment consistently outperforms other investments.
Another key component is the fee structure, which can be as high as 2% on mutual funds, or $7 per trade with an online broker. The role this plays in your returns cannot be understated – see for yourself with this investment fee calculator, provided by InvestRight, the educational arm of the British Columbia Securities Commission.
The Elements of a Diverse Portfolio
A diversified portfolio would include different asset classes. An asset class is a group of securities that exhibit similar characteristics, behaves similarly in the marketplace, and has similar risk and return profiles. The three main asset classes are equities; fixed income products; and cash and cash equivalents.
As our friends at Investopedia say, popular equities includes shares in public companies, shares in private companies, mutual and index funds, real estate funds and trusts, and commodities such as gold and diamonds. A shareholder has a claim to a part of the corporation's assets and earnings. In other words, a shareholder is an owner of a company.
Fixed Income includes corporate and government bonds (such as Guaranteed Investment Certificates or GICs). A bond is a loan between an investor and a company or the government. It’s like an IOU, where the borrower agrees to repay the principal loan plus interest which can be paid throughout or at maturity of the loan.
Cash or Cash Equivalents – cash and savings sit here. It includes what you have easy access to, without penalty (such as the penalty on an early withdrawal from an RRSP). However, as we said in our blog last week, “With savings rates in Canada around 1% and inflation hovering around 2% savings in the bank can lead to a loss of money in real terms.”
So, cash and cash equivalents should be part of your plan, but to get growth you need to balance your portfolio with the other asset classes such as stocks and bonds.
Diversifying into the Private Markets
It is now easy to invest in public and private companies. Public companies offer liquidity as you can buy and sell these securities on an exchange. Private securities are generally illiquid but typically target a higher return at higher risk. A well-diversified portfolio should ideally include investments in both public and private market securities. The composition between public and private investments depends on your investment objectives, risk tolerance and need for liquidity in your investment portfolio.
FrontFundr unlocked investing in private market securities to accredited and non-accredited investors, the public. Often these investments are also eligible for Registered Plans (RRSP and TFSA)
If you are considering an investment that you can be more connected to, shares in private companies, real estate investment funds or bonds, have a look at the range available for no fees* on FrontFundr today.
*FrontFundr charges no fees to investors, however, there may be fees to set up and manage an RRSP/TFSA.