Some investors misunderstand the importance of diversification, writes Peter Watson.
The concept of having strong diversification with your investments can be misunderstood.
Let’s consider the example of an investor who prides themselves on taking risks. That person is not afraid of risk and sometimes that characteristic can reflect the type of person they are.
You might’ve heard of the expression, “go big or go home,” that sometimes can be a badge of honour to someone that is not afraid of risk. They have the confidence and the courage to accept risk.
I take a different perspective. Diversification is not an admission that you are afraid of risk. It is that you are thoughtfully realistic and accept the reality that when it comes to investing, diversification is your friend.
Assume our risk-taking investor wants to allocate 100 per cent of their investment portfolio to equities. That is a high-risk taker.
There is nothing preventing that “risk taker” diversifying their portfolio. There are endless number of stocks or mutual funds that own stocks that can provide equity exposure.
An investor believing in diversification could populate their portfolio with many different types of stock investments. That is strong diversification.
Yes, you have all your money invested in stocks and that is a risk. But strong diversification can mitigate investment risk.
Psychologists have studied why different people have different attitudes to risk-taking. It has less to do with investing and more to do with the person.
All investors must decide on the amount of risk they will take. But to abandon the ability to diversify your investments is in my opinion a big mistake.
Bad things can and do happen. Protect yourself and your investment portfolio by always maintaining a strongly diversified investment portfolio.
Watson Securities (www.watsoninvestments.com) is a trade name of Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (www.iiroc.ca) and a Member of the Canadian Investor Protection Fund (www.cipf.ca). Watson Securities is registered to advise in (securities and/or mutual funds) to clients residing in Ontario. This publication is for informational purposes only and shall not be construed to constitute any form of investment advice. The views expressed are those of the author and may not necessarily be those of ACPI. Opinions expressed are as of the date of this publication and are subject to change without notice and information has been compiled from sources believed to be reliable. This publication has been prepared for general circulation and without regard to the individual financial circumstances and objectives of persons who receive it. You should not act or rely on the information without seeking the advice of the appropriate professional.
