Investment Diversification
US large caps have dominated the past decade, but nothing outperforms forever. A case for diversification.
Why not focus solely on US large caps?
We would like to share some important thoughts with you about investment strategy.
While US large-cap stocks have been the best-performing asset class over the past ten years, it is essential not to concentrate all your investments in this single category. Here is why:
- Market cycles: Financial markets are cyclical. Nothing outperforms forever. For example, between 2000 and 2009, growth stocks lost a third of their value, while many other asset classes performed very well. Diversifying your investments helps reduce the risks associated with these cycles.
- Diversification opportunities: By investing in different asset classes, you can take advantage of opportunities offered by emerging markets, small and mid caps, bonds, and much more. This diversification can improve the stability and overall performance of your portfolio.
- Risk management: Concentrating your investments in a single asset class increases the risk of significant losses if the market turns. By diversifying, you spread out risk and protect your capital.
We are available to discuss these strategies in more detail and help you optimize your portfolio. Don’t hesitate to contact us with any questions or to schedule a meeting.
What does well-thought-out diversification look like?
Diversifying is not simply holding several investments: it means spreading your capital across assets that do not all react the same way to the same events. In practice, this can happen along several dimensions:
- Asset classes: stocks, bonds, cash and, depending on your profile, certain alternative investments.
- Geographic regions: Canada, the United States, international and emerging markets.
- Industry sectors: technology, health care, financials, energy, consumer goods, and so on.
- Company sizes: large, mid and small caps.
How much weight each of these elements should carry depends on your investment horizon, your risk tolerance and your goals. There is no universal allocation that suits everyone.
Diversification does not protect against everything
Let’s be transparent: diversification does not guarantee a profit and does not eliminate the risk of loss. In some crises, most asset classes can decline at the same time, at least temporarily.
Its role is rather to reduce the depth of the declines and your portfolio’s dependence on a single scenario. Historically, this approach has helped many investors get through market cycles with greater peace of mind — and avoid the rushed decisions that can prove costly.
Discipline, the other half of the job
A diversified portfolio does not stay that way on its own. Over time, the best-performing asset classes take up more room, which can change your risk level without you realizing it. Periodic rebalancing brings the portfolio back toward its target.
Periodic reviews are also the time to adjust the strategy to changes in your life: a new job, the sale of a business, retirement approaching. Your registered accounts (RRSP, TFSA, LIRA, RRIF) each have a role to play in that allocation, depending on your situation.
If you would like to check whether your portfolio is truly diversified — and not simply filled with investments that all look alike —, the Pérennité team can review it with you, in light of your goals.
