Key Strategies for Investment Portfolio Diversification
TORONTO, ON, CANADA - While some investors have an enormous appetite for risk and chase the highest returns in the shortest possible time, the majority play a longer game, pursuing specific financial goals over years or even decades. Within the second group, the aim is to maximize returns while minimizing risk, and the history of investing has demonstrated that a diversified portfolio is one of the best ways to balance risk and reward. “It is hardly surprising that novice investors start with learning about asset allocation and diversification. While no mix can work for all, it is vital to have a carefully weighted portfolio so as to mitigate the impact of volatility and improve the chances of attaining one’s financial goals. Moreover, a single diversification strategy is highly unlikely to deliver the desired outcomes, and the choice will be primarily guided by time horizons and risk tolerance. Another essential thing investors should keep in mind is that diversification is a process: the initial asset mix needs to be monitored and its performance evaluated, with the portfolio periodically rebalanced to ensure a consistent level of risk,” says Toronto-based portfolio manager and investment advisor Francesco Coccimiglio.
As the US Securities and Exchange Commission (SEC) explains in one of its guides, “The practice of spreading money among different investments to reduce risk is known as diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.” One of the reasons diversification works is because of asset correlation, meaning that properly constructed portfolios contain investments that respond differently to market conditions. For example, economic factors that affect stocks typically have little or no impact on bonds, Francesco Coccimiglio explains, adding, “Correlation is one of the first things investors should consider when deciding on the asset mix. Holding a large number of positions is not enough – they have to be investments that move independently of each other, ideally in opposite directions."
Along with determining correlation, investors should consider diversifying both across and within asset classes. In the first case, it means having a carefully weighted selection of two or more categories, the most popular ones being stocks, bonds, commodities, and cash. As for diversifying within asset classes, it can be achieved by mixing up industries, investing in companies of varying sizes, or including different bond maturities and issuers. Other strategies to consider are gaining exposure to foreign stocks and exploring atypical options, such as real estate investment trusts (REITs). Francesco Coccimiglio concludes, “A diversified portfolio is the bedrock of any investment strategy aimed at building up wealth over time. How investors approach the task will depend on their financial goals, risk tolerance, and time horizon, but they should remember that diversification will ensure success only when combined with a disciplined approach to investing and consistent oversight.”
Francesco Coccimiglio, a Certified Investment Manager (CIM®) based in Toronto, Canada, has dedicated the past 13 years to putting his clients in control of their financial future through creative wealth-building strategies. He draws on his considerable experience in the banking industry, where he has built expertise in securities, mutual funds, risk management, and investment advisory services. Committed to integrity and transparency, Francesco Coccimiglio is a firm believer in placing clients’ interests first while also educating them on critical financial matters.