Saturday, February 12, 2011

Are You Diversified? How Can You Tell?

One of the most common questions investors have is whether or not they are diversified. For most, the answer is no. But how can you tell if you are diversified so that you can avoid your portfolio imploding during the next stock market bust?

To truly be diversified an investor must own a broad range of securities and businesses that generate income in many different ways, and in many different places.

  • Firstly, your businesses or investments must be located in a number of different places. This means that your portfolio should be generating income across the country, and around the world. As Canadians, most of our investments generate their income in Canada, but it is important for us to remember that this is a VERY small part of the world economy. We must also include businesses from the United States, Europe, and the developing world. Initially, the best way to do this might be to own a business like Coca-Cola (NYSE: KO) or Proctor and Gamble (NYSE: PG), which generate profits all around the world.

  • Secondly, the intelligent investor should ensure that they own different asset classes of securities. This means that they should own bonds, real estate, and stocks... in addition to perhaps gold, silver, etc. in a larger portfolio. One should not own simply businesses listed on the stock exchange and not any bonds or something that will provide a more steady stream of income. But be careful, DO NOT own too much real estate, this is a very common mistake in the current investment climate. 

  • Lastly, the intelligent investor must own a number of businesses that generate their income in different areas of the economy. For instance, Scotiabank (TSE: BNS) generates its income via banking, Suncor (TSE: SU) generates its income in the oil and gas industry, and Metro (TSE: MRU.A) generates its income in the grocery retail businesses. Together, these three businesses would provide the investor with a broader and more steady stream of income than if they owned just one. When one part of the economy is declining, another might very well be increasing.
Disclosure: The author of this article has an ownership interest in Metro and Suncor.

Be sure to e-mail me with any of your questions : )

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