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Retirement: The advantages of diversification

Diversification is the golden rule of investment, and it becomes critical upon retirement. It simply means not putting all your eggs in one basket to ensure you have a stable retirement income.

You choose investments that will not fluctuate up and down at the same time. In a diversified portfolio, a decline in one investment is usually offset by growth in another.

If, for example, you want to invest $20,000 in an international equity fund, your portfolio then becomes vulnerable to foreign market fluctuations.

If, however, you distribute this amount among several types of investments (term savings, bonds, dividend funds, Canadian and foreign equity funds), you increase your chances of getting a good overall return, regardless of market conditions.

Basic triple diversification

Investment diversification means that your portfolio includes liquidity, fixed-income securities (such as term savings or bonds) and growth securities (equity or equity fund shares). You therefore benefit from investments whose returns and behaviour complement each other.

Term diversification is useful in the short, medium and long term. If you have $10,000 to invest in term savings, you can spread this amount in equal parts over 5 years: $2,000 in a security for a 1-year term, $2,000 in a 2-year security, etc. This way, you'll receive liquidity from a security that has matured, which you can cash in or reinvest. By renewing for 5-year terms with each maturity, you get a better rate.

Geographical diversification lets you combine Canadian and foreign securities. You benefit from economic growth, regardless of the continent or country of origin.

Advanced diversification

Other criteria make it possible to go further than basic triple diversification. The principle is the same: your assets must not be influenced by the same variables.

Diversification of economic sectors. These sectors don't react in the same way to market developments. If you invest in shares, it's important to distribute your assets among various sectors of activity, such as health care, technology and utilities. If you invest in Canadian or U.S. equity funds, the portfolio mix generally provides for diversification.

Diversification of capitalization. When you invest on the stock market, regardless of whether you invest directly or in mutual funds, it may be advantageous to choose growth company securities (small and mid-capitalization) over major company securities (large capitalization). In a given economic situation, they don't always behave in the same way.

Diversification of management styles. Choose funds where some managers are very aggressive, while others are more cautious. The styles complement each other and increase your return potential.

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