Page 144 - A Canuck's Guide to Financial Literacy 2020

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unique business risks associated with each individual security. You may diversify your
investments by either or a combination of:

▪ Asset Class – having stocks and fixed income in your portfolio will diversify your
portfolio
▪ Company Size – large cap companies are more stable than small cap companies.
▪ Industry – adding companies in various industry will allow your portfolio to withstand
business cycles
▪ Geographic – investing in different countries can reduce the risk of your portfolio
▪ Management Style – depending on the portfolio manager’s mandate, diversification
can be achieved. (Value vs. Growth)
▪ Maturity – Bond laddering or GIC ladder can add diversification to a portfolio. Buying
fixed income instruments at different intervals
▪ Credit – Including companies with strong credit rating and low credit rating such as
high yield bond.

Monitoring and Rebalancing

It’s important to be aware of market changes as the asset allocation you embrace at the
beginning of the portfolio might not be suitable for you in the future due to changes in your
investment goals, personal goals or economic fluctuations. For example, if there is a
recession coming, you may lower your risk exposure in stocks and add more fixed income
to your portfolio in order to preserve your capital.

Rebalancing is an important part of your portfolio as the percentage of each asset class you
have chosen may have shifted over time. For example, if you’ve indicated that you want
only 20% in Canadian stocks and Canadian stocks do really well causing your asset
allocation percentage to go to 25%, you would have to rebalance and allocate the profit in
Canadian stocks to a sector that hasn’t done that well. By doing so, you will ensure that
your investments are in a diversified mix.