Why Diversify?

Because winners rotate. A look back at the last five years shows how hard it is to consistently pick the best performing asset class.

Annual Returns of Key Asset Classes (CDN$)

 20152016201720182019
Best Return U.S. Equities
21.6%
Canadian Equities
21.1%
Emerging Markets Equities
28.7%
U.S. Bonds
9.0%
U.S. Equities
24.8%
Worst Return Canadian Equities
-8.3%
International Equities
-2.0%
U.S. Bonds
-3.3%
Canadian Equities
-8.9%
Global Bonds
1.4%

The only investors who shouldn't diversify are those who are right 100% of the time." – Sir John Templeton

Five Ways to Diversify Your Portfolio

A diverse portfolio can protect you from downturns and give you access to the best investment opportunities this year – every year.

Diversify by Asset Class

There are three main asset classes:

  • Equities (or stocks)
  • Fixed income (or bonds)
  • Alternatives (including hedge strategies, which seek to lower risk and improve returns).

Adding countries to these basic categories adds nuance – Canadian Equities, for example, or U.S. bonds. But even at their simplest, no single asset class consistently rises to the top.

Explore the “Why Diversify Investor Flyer” to see 15 years of rotating winners. And talk to your advisor about building a portfolio that lets you take part in each year’s best ideas.

Diversify by Sector

“Sector” is another way of saying “industry.” In Canada, that often means financial, energy and material stocks. But if you’re only investing in those three – or if you’re only investing in Canada, for that matter – you might be missing out.

Industries fall in and out of favour. By investing in many sectors, you have a better chance of benefiting from industries that are on the rise.

Canadian Sectors – Annual Performance Rankings

2010201120122013201420152016201720182019

Sources: Bloomberg, Standard and Poor's, as of December 31, 2019. TSX Composite GICS Sectors.

Consumer Discretionary 4 9 3 2 4 5 7 2 10 8
Consumer Staples 10 3 2 6 1 2 9 9 3 9
Energy 8 8 9 7 11 11 2 11 11 6
Financials 9 7 5 5 9 6 3 6 8 7
Health Care 1 1 1 1 3 9 11 1 9 11
Industrials 7 6 6 3 6 8 4 3 5 3
Information Technology 11 11 10 4 2 1 10 4 1 1
Materials 2 10 11 11 10 10 1 10 7 4
Telecom Services 5 2 7 8 8 4 6 5 4 10
Utilities 6 4 8 10 7 7 5 8 6 2
Real Estate 3 5 4 9 5 3 8 7 2 5

Diversify by Region

Most investors stay close to home. Look at Canada. Canada makes up less than 3% of the world’s economy. But almost 74% of the average Canadian portfolio consists of Canadian investments.1

Is it time for you to look beyond our borders? Adding investments from other regions can boost your portfolio by exposing it to:

  • Economies that are growing faster today
  • Economies that are poised for higher growth in the future.


IMF 2017 and 2023 projected GDP growth rates (%)2

IMF 2017 and 2023 projected GDP growth rates (%) chart


Sources:
(1) Bloomberg and Investor Economics as of December 31, 2019.
(2) IMF World Economic Outlook Database, as of October 2019.

Diversify by Market Capitalization

Market capitalization—or market cap—refers to a company’s size. Market cap tells us how much money investors have given a company based on the number and price of that company’s shares. Large cap companies have shares valued at more than $10B. Small cap companies have shares valued at less than $2B.

Companies of different sizes perform differently as markets change. To diversify your portfolio, invest in companies of various sizes – or choose a mutual fund that does that for you.

Annual performance return by market capitalization (CDN$)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Canadian Small Caps
38.53%
U.S Large Caps
4.96%
Global Small Caps
16.00%
U.S Small Caps
48.14%
U.S Broad
23.93%
U.S Large Caps
21.85%
Canadian Small Caps
35.39%
Global Small Caps
16.15%
U.S Large Caps
4.77%
Global Large Caps
25.33%
U.S Small Caps
20.24%
U.S Broad
4.64%
Global Broad
13.96%
U.S Broad
41.27%
U.S Large Caps
23.86%
U.S Broad
21.59%
Canadian Large Caps
21.36%
Global Broad
14.99%
Global Large Caps
4.31%
U.S Large Caps
25.18%
Global Small Caps
20.10%
Global Large Caps
3.42%
U.S Small Caps
13.77%
U.S Large Caps
40.93%
Global Broad
15.01%
Global Large Caps
20.18%
U.S Small Caps
17.11%
U.S Large Caps
14.29%
U.S Broad
4.23%
U.S Broad
24.84%
Canadian Large Caps
13.84%
U.S Small Caps
-1.80%
U.S Large Caps
13.63%
Global Small Caps
37.84%
U.S Small Caps
14.35%
Global Broad
19.55%
Global Small Caps
8.22%
U.S Broad
13.83%
Global Broad
0.06%
Canadian Large Caps
21.93%
U.S Broad
9.06%
Global Broad
-2.67%
U.S Broad
13.43%
Global Broad
35.91%
Global Large Caps
14.01%
Global Small Caps
19.18%
U.S Broad
8.09%
Global Large Caps
13.39%
U.S Small Caps
-3.00%
Global Broad
21.91%
U.S Large Caps
7.98%
Global Small Caps
-8.75%
Global Large Caps
11.99%
Global Large Caps
30.38%
Canadian Large Caps
12.27%
U.S Small Caps
14.64%
U.S Large Caps
7.67%
Canadian Large Caps
9.78%
Global Small Caps
-6.28%
Canadian Small Caps
19.20%
Global Broad
6.48%
Canadian Large Caps
-9.08%
Canadian Large Caps
8.07%
Canadian Large Caps
13.26%
Global Small Caps
11.41%
Canadian Large Caps
-7.76%
Global Large Caps
6.64%
U.S Small Caps
7.12%
Canadian Large Caps
-7.58%
U.S Small Caps
19.18%
Global Large Caps
-1.11%
Canadian Small Caps
-14.17%
Canadian Small Caps
2.46%
Canadian Small Caps
7.76%
Canadian Small Caps
-0.09%
Canadian Small Caps
-13.75%
Global Broad
4.41%
Canadian Small Caps
6.38%
Canadian Small Caps
-18.17%
Global Small Caps
18.90%

Source: Morningstar Research, as of December 31, 2019

Diversify by Investment Style

When it comes to stock-picking, there are two main styles – Value and Growth – as well as a hybrid style (GARP) that combines elements of the other two.

Value investors look for companies that appear to be selling at a bargain. Growth investors look for companies that simply live up to the name. GARP investors land somewhere in the middle, seeking to invest in companies that offer Growth at a Reasonable Price.

No one style is the consistent winner. A diverse portfolio might include all three.

 


MSCI World Growth vs. MSCI World Value
One-Year Return Differential
1975 - 2019

MSCI World Growth vs. MSCI World Value One-Year Return Differential chart

Remember to Rebalance

Markets change. A portfolio that’s diversified today might not be as diversified two or three years from now. Use Franklin Templeton’s Automatic Rebalancing Service to stay on track. And talk to your advisor to make sure your portfolio can take you where you want to go.