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$)

 20142015201620172018
Best Return U.S. Equities
23.9%
U.S. Equities
21.6%
Canadian Equities
21.1%
Emerging Markets Equities
28.7%
U.S. Bonds
9.0%
Worst Return Canadian Bonds
-1.2%
Canadian Equities
-8.3%
International Equities
-2.0%
U.S. Bonds
-3.3%
Canadian Equities
-8.9%

"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

2009201020112012201320142015201620172018

Sources: Bloomberg, Standard and Poor's, as of December 31, 2018. TSX Composite GICS Sectors.

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

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

Table showing IMF 2017 and 2023 projected GDP growth rates (%)

2017

2023

Sources: (1) Bloomberg and Investor Economics as of December 31, 2018. (2) IMF World Economic Outlook Database, as of October 2018.

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$)

Table showing annual performance return by market capitalization (CDN$)

Source: Morningstar Research, as of December 31, 2018

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, 1975-2018

Table showing MSCI World Growth vs. MSCI World Value Differential

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.