Mutual funds can help diversify your investments
Most investors are aware that diversification is a key element in investment success. That's one reason mutual funds are so attractive. Each mutual fund pools the resources of many investors to purchase a diversified portfolio of holdings – many more than any individual investor could afford.
Mutual fund* investors can add another layer of diversification by making sure their portfolio includes several funds with different objectives or management styles. Here are some strategies to keep in mind when contemplating your own diversified portfolio.
Start with your objectives
You cannot build a solid portfolio if you don't first prepare the foundation. This means taking a frank look at how long you are prepared to hold your funds, how realistic your performance expectations are, and how you'll react when your funds hit a bit of turbulence. Remember, the volatile nature of certain mutual funds requires patience and long-term commitment.
Choose quality over quantity
Be careful not to overdiversify by spreading relatively small dollar amounts among too many funds. Remember, a mutual fund is already a diversified group of investments. Excessive diversification simply dilutes your portfolio's overall growth potential.
Regardless of how much money you have, few investors will ever need more than eight or ten different funds. If you're just getting started, you may want to consider investing in one good balanced fund until you've built up your savings.
Diversify by asset class
Different elements of the economy respond differently to changing economic conditions. For example, what's good for bonds may not be as good for equities. To ensure your portfolio is responsive no matter what the economy is doing, you may want to include as part of your holdings money market funds (cash-equivalent securities), bond or mortgage funds (income), and equity funds (stocks).
The proportion of each asset class you hold will vary depending on your objectives and current market conditions. So, you'll want to review your allocations every year or two.
Diversify by geography
International diversification can shield your portfolio from undue volatility in any one region – including Canada. Besides, there are simply too many compelling investments around the world not to take advantage of them.
Your options range from funds that invest exclusively in the world's major economies to those that specialize in the dynamic emerging markets.
Diversify by management style
Not all mutual funds are managed the same way. "Value" managers, for instance, look for bargain stocks that are trading for less than they are worth. "Growth" managers focus on the potential of a stock's price to go up and how fast it will do so.
Take advantage of professional advice
Professional guidance can help you sift through your options to find mutual funds that are appropriate for you.
Contact us today to get your investment strategy on the right track.