A solid financial plan can withstand market volatility

Retirement dreams can come true if you have a solid investment plan in place. In this four part series we look at the rules of successful retirement planning.

RULE #4: Diversify

Diversification means you invest in different asset classes. It may be the single greatest factor in your long term investing success. The three main types of assets are stocks, bonds, and cash or cash equivalents. There are numerous sub-classes, for example domestic and foreign stocks and bonds, large cap and small cap stocks, and various economic and industry sectors.

Different asset classes perform differently depending on economic conditions. When you hold a variety of assets in your RRSP, your returns are more consistent. If one type of asset performs poorly, the others cushion the blow. At the same time, with a diversified portfolio you’re more likely to own a piece of the best performing asset class.

Wouldn’t it be better to put all your money in the hottest asset class? Sure, but it’s impossible to predict what it will be. Only rarely is a single asset class the best performer from one year to the next.

Canadians should pay particular attention to diversification into foreign markets. You may have heard that Canada represents just 2% of the world’s market capitalization. Given the small size of Canada’s markets, and our reliance on cyclical resources, it makes good sense to expose your investment portfolio to foreign markets.

Mutual funds are offered through Credential Asset Management Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. This article is provided as a general source of information and should not be considered personal investment advice, tax advice, or solicitation to buy or sell any mutual funds and other securities. ^®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.

January 23, 2008