Diversification is one of the best ways to create a smoother investment experience. As an investor, it means spreading your money across a mix of investments. Why? Different types of investments perform in different ways over time. When some are rising in value, others may be decreasing or maintaining their value. So diversification helps to smooth out your returns. The chart on this page shows you how it works.
How do you diversify when you invest?
Start with making sure you invest across the three main types of investments (called asset classes): cash, fixed income and equities. How much of your total investments – your portfolio – should you invest in each asset class? The answer will depend on your personal situation and your preferences as an investor. For example:
- Why are you investing? What are your goals?
- How long do you have to reach those goals?
- What degree of safety is important to you as you invest? What is your capacity to take on risk? Markets move both up and down. Will you lose sleep if your investments lose value when markets dip?
It’s important to answer these questions before you decide what to invest in.
Use the interactive chart below to see how choosing a diversified portfolio better positions you to achieve growth while limiting the impact of market ups and down.
A diversified portfolio helps you strike the right balance between security and growth
Click to learn about the benefits of each asset type within a portfolio
Source: RBC GAM
Historical returns refer to five-year rolling returns for a 25-year period ending December 31, 2023
Past performance is not a guarantee of future results. Five-year rolling returns refer to periods of 60 consecutive months with new periods beginning on the first day of each month.
Diversified Portfolio assumes monthly rebalancing as represented by 2% Cash, 38% Fixed Income, 15% Canadian Equities, 25% U.S. Equities, 15% International Equities and 5% Emerging Market Equities. Cash represented by FTSE TMX Canada 30 DAY T-Bill Index; Fixed Income represented by FTSE TMX Canada Universe Bond Index; Canadian Equities represented by S&P/TSX Composite Index; U.S. Equities represented by S&P 500 Index; International Equities represented by MSCI EAFE Index; Emerging Markets Equities represented by MSCI Emerging Markets Index. All returns are total returns in Canadian dollars, unless otherwise noted. Index returns do not reflect deduction of expenses associated with investments. If such expenses were reflected, returns would be lower. An investment cannot be made directly in an index.
Historical returns refer to five-year rolling returns for a 25-year period ending December 31, 2023
○ = average return
This chart shows five-year rolling returns for a 25-year period ending December 31, 2023. You can see the range of returns of each asset class – from highs to lows.Past performance is not a guarantee of future results. Five-year rolling returns refer to periods of 60 consecutive months with new periods beginning on the first day of each month.
Diversified Portfolio assumes monthly rebalancing as represented by 2% Cash, 38% Fixed Income, 15% Canadian Equities, 25% U.S. Equities, 15% International Equities and 5% Emerging Market Equities. Cash represented by FTSE TMX Canada 30 DAY T-Bill Index; Fixed Income represented by FTSE TMX Canada Universe Bond Index; Canadian Equities represented by S&P/TSX Composite Index; U.S. Equities represented by S&P 500 Index; International Equities represented by MSCI EAFE Index; Emerging Markets Equities represented by MSCI Emerging Markets Index. All returns are total returns in Canadian dollars, unless otherwise noted. Index returns do not reflect deduction of expenses associated with investments. If such expenses were reflected, returns would be lower. An investment cannot be made directly in an index.
Cash
- Cash equivalents include GICs, T-bills and money market funds.
- The growth potential for cash is low compared to other asset classes. So is the risk of losing money. In fact, the historical data shows cash equivalents typically don’t lose money.
- Adding fixed income and equity, which offer the potential for relatively higher returns, can help your portfolio to grow and outpace inflation. These asset classes may also receive more favourable tax treatment if you are investing outside a registered plan like an RRSP or RESP.
Equities
- The Canadian stock market is concentrated in the Financial, Energy and Materials sectors.
- U.S. equities provide broad sector exposure to some of the world's largest companies. Many of these companies operate in global markets.
- International equities offer more opportunities to diversify. They add exposure to both developed and emerging opportunities outside North America.
- Historically, equities have had the highest growth. They also have the potential for higher losses. Equities receive the most favourable tax treatment if you are investing outside a registered plan like an RRSP or RESP.
Adding fixed income and cash to equities in your portfolio can help smooth out the ups and downs you may see with equities.
Fixed income
- Fixed income include many different types of bonds.
- Fixed income typically offers higher returns than cash investments. But a portfolio consisting only of fixed income investments may not provide the growth you need.
- Adding equities to your portfolio can add growth and also help you take advantage of lower tax rates if you are investing outside a registered plan like an RRSP or RESP.
Diversified portfolio
- Combining all three asset classes in your portfolio can help you benefit from the growth potential of equities and while you enjoy the increased stability and lower risk provided by cash and fixed income investments.
- The right mix for you depends on your personal situation and preferences as an investor.
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Remember, at a given time, any one asset class, region, sector or style may be leading the market while others lag. But in a diversified portfolio, a decline in one investment may often be offset by growth in other assets.
Ready to invest? Talk to your advisor to learn more about diversifying your investments.