The basics of diversification Investment diversification is a portfolio strategy that even the most novice investor or casual market-watchers can understand. At its most basic level, diversification is simply the financial articulation of that wisdom which we’ve all heard at one time or another: don’t put all your eggs in one basket. It’s common sense, really – because not every investment moves in the same direction at the same time, it makes sense to spread your investments across a mix of asset classes, geographies and investment approaches. By owning a combination of different investments, the losses that you might experience in one investment might be offset (at least to some degree) by the gains which you realize in another. Over time, this strategy leads to more stable, more predictable returns which, in turn, lead to less sleep lost due to market volatility and more strategic, less emotional decision-making. The classic example of investment diversification is the so-called 60/40 portfolio split between stocks and bonds that you’ve probably heard about. Speaking very generally, stocks offer potential for growth while bonds provide stable, predictable income. Because stocks generally fall during economic slowdowns while bonds often rise (or at least hold their own), combining these two in your portfolio should theoretically help to smooth out the wild ups and downs which your portfolio would experience if you simply went all-in on either one. Over the years, a number of academic studies have been done to suggest that the optimal combination in most market environments is a portfolio comprised of somewhere in the neighbourhood of 60% conservative blue-chip stocks and 40% government bonds. Keep in mind, however, that “optimal” does not mean “risk-free.” Yes, diversification can minimize the impact of poor performance in any one asset class or market geography. But it’s by no means a panacea or perfect antidote for market risk. Even the most well-diversified portfolios will experience sudden drops and drawdowns in the face of market turmoil. A Deep Dive on Diversification It’s barely half over, but it seems pretty clear that 2025 will go down in the history books as a year of change. Long-standing national relationships seem very much up in the air. Existing alliances have been called into question. Old friendships have become strained. Conflict over trade, tariffs and tweets has led to ongoing political friction and a good deal of market mayhem. It seems that we have entered a new age of uncertainty in which investment markets and entire economies can change every time you turn on the nightly news – or scroll through your social media feed. If there’s one overarching lesson that investors can take from 2025, it’s the importance of diversification. Just as Canada has learned a difficult lesson in how over-reliance on a single economic partner can leave you exposed to shifts in policy or politics, so too have investors learned how overweighting a single asset class (stocks), one geographic market (U.S. stocks) or one investment strategy or approach (U.S. growth stocks) can leave you dangerously vulnerable to the downward pressures that occur when trade policy or tax regulations or geopolitics change on a dime. All of which makes this an exceptionally good time to take a deep dive into diversification and examine closely what the strategy entails, its purpose and how you might put it to work to make your portfolio a little stronger (and your sleep a little sounder) in this time of rapid economic and market change. By James Dolan The why, what and how of putting your eggs in different baskets during volatile times 26 | www.snowbirds.org Finance
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