|
By Adrian Mastracci
North Shore News
Business Section, "Loose Change"
Sunday, May 19, 2002
It's been said that investment heaven is the place where high returns
are earned all of the time. Could someone please point the way?
Diversification and rebalancing strategies are two essential tools
that assist in achieving better consistency of returns for your
portfolio. They are as close as you can get to that much sought
after investment heaven.
Diversification involves spreading your investment bets across
a number of selections. Rebalancing involves periodic tweaks to
bring your portfolio back into line with the appropriate targets
and asset mix set within your game plan.
Look upon diversification as a welcome safeguard. You don't want
problems arising in any one asset class to ruin your well crafted
portfolio.
Therefore, it's prudent to spread your nest egg across a variety
of investments. That allows you to aim for consistency of returns
and minimize the potential of significant losses from any one component.
Portfolios ought to contain a variety of asset classes that don't
all move in unison. Let's look at the results of the last two years.
In 2000, Canadian bonds were the top asset class while emerging
market equities occupied the basement. In 2001, US small cap equities
were in the winner's circle while foreign equities drifted to the
bottom.
Here are some paths to achieve portfolio diversification:
Different Asset Classes
Choosing different asset classes is the first step of diversification.
The most common classes are equities, bonds, cash and real estate.
Economic Regions
Portfolios may include selections from global economies outside
of Canada. Say the USA, Europe and the Far East countries.
Exposure to Foreign Currencies
Portfolio selections can be purchased in Canadian dollars, US dollars
and the Euro to name a few.
Time to Maturity
A portion of the portfolio could have a range of investment maturities
- from as short as 30 days to as long as 30 years.
Level of Liquidity
Cash components, such as term deposits, could be easily cashable
while real estate holdings are usually considered less liquid and
require a longer investment horizon.
Type of Security
Portfolios may contain a selection of individual stocks, mutual
funds, ETF's, index funds and hedge funds.
Management Style
Portfolios may be constructed with active or passive management
styles. Portfolios often choose one style as the core and include
a sprinkling of the other style.
Sector Emphasis
Some portfolios choose to emphasize specific sectors of the economy,
sometimes to the exclusion of others.
Investment Quality
Some investors trade investment quality for higher yields and the
potential for bigger losses. An example is a bond issued by the
Government of Canada versus one rated as a junk bond.
Because a diversified portfolio is assembled from selections that
don't move in unison, the initial allocation and weights of the
portfolio selections will drift over time. That drift can become
significant, perhaps also affecting your investment profile.
A diversified portfolio reduces investment risk because if one
selection is suffering, the others should help cushion the rest
of your portfolio.
Where do you go from here? Revisit your asset allocations to ensure
their appropriateness for your situation.
|
