Because winners rotate.
Why Diversify?
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$)
Source: Morningstar Research Inc., December 31, 2024.
The only investors who shouldn't diversify are those who are right 100% of the time.
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
- Diversify by Sector
- Diversify by Region
- Diversify by Market Capitalization
- Diversify by Investment Style
Diversify by Asset Class
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
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
Source: Morningstar Research Inc., December 31, 2024. S&P/TSX Composite Sector Indexes (CAD).
Diversify by Region
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 2024 and 2029 projected GDP growth rates (%)2
Sources:
(1) Bloomberg and Investor Economics as of December 31, 2019.
(2) IMF World Economic Outlook Database, as of October 2024. Estimates start after 2023.
Diversify by Market Capitalization
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 $2B.
Companies of different sizes perform differently as markets change. To diversify your portfolio, invest in companies of various sizes – or choose a mutual fund that does that for you.
Annual performance return by market capitalization (CDN$)
Source: Morningstar Research, as of December 31, 2024.
Diversify by Investment Style
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 - 2024
Source: Morningstar Research, as of December 31, 2024.