by Tom Bradley

I’m a Tragically Hip fan, so Gord Downie’s final concert last weekend was an emotional event in our household. Appropriately, we celebrated it with a group of people at Crystal Lake, which is just 20 minutes north of Bobcaygeon, the inspiration for one of The Hip’s great songs.

But it’s another of their songs that inspires this post. I’m working on a presentation for the Institute of Advanced Financial Planners, in which I’ll be talking about portfolio construction and diversification. One of my points is that portfolios must be diversified Fully Completely.

That means exposure to different asset classes, and diversity within those asset classes. Fully completely is: cash or GICs; government, corporate and high yield bonds; stocks of all sizes, industries and geographies; and perhaps some mortgages, preferred shares and real estate.

This may seem like basic stuff, but I come across too many investors, particularly income-oriented ones, who are so focused on tax-efficient or higher yielding securities that their portfolios are far from being diversified. They mostly own Canadian banks, REITs (real estate investment trusts), utilities, pipelines and some oil and gas. As a result, they’re exposed to a narrow range of business types that all operate in the same economy – Canada.

Take the banks for instance. As well capitalized as Canada’s Big 6 are, they are still highly-leveraged corporations that are reliant on customers that are also highly indebted. Owning half your assets in bank bonds, preferreds and common shares is just not prudent.

To be clear, there’s nothing wrong with tilting towards higher yielding stocks, but it should be done in the context of a portfolio that has exposure to a broad range of economic factors.

As for young investors, their portfolios should be invested primarily in stocks, but even there, they should cover all the bases, not just mirror their parents’ dividend portfolios.

Diversification is the only free lunch in investing. When done properly, it reduces volatility and surprises without impacting long-term returns. Do it and you’ll be Ahead by a Century.

(If my bank example caught your attention, I’d encourage you to read our previous posts on the topic from December, 2014 and June, 2013.)