Diversification is a way to try to reduce the risk of your portfolio by choosing a mix of investments. Investors diversify their portfolios because not all types of investments perform well at the same time, and different types of investments are affected differently by world events and changes in economic factors such as interest rates, exchange rates and inflation rates. The key to diversification is to not put everyone in one investment. Your overall investment portfolio should match your risk tolerance, but each investment may have different characteristics, to minimize overall risk.
One way to diversify your portfolio is to invest in several asset classes. An asset class is a group of investments with similar risk and return characteristics. The three main asset classes are cash and equivalent investments, fixed income investments, and equity investments.
You can diversify within an asset class, but simply increasing the number of stocks will not reduce risk. To diversify, you need to select stocks whose prices are less likely to move together – for example, diversifying by investing in different industries (e.g. financial services, energy, health care and utilities).
Learn more about diversification on GetSmarterAboutMoney.ca. Speak to a registered financial advisor about how to diversify your portfolio based on your financial goals and personal financial situation.