No single investment performs well under every condition. If a large portion of your portfolio is over concentrated in one type of investment and bad news causes its value to drop unexpectedly, your financial security will be put in jeopardy.

Riding the waves

You cannot control the factors that cause investment prices to fluctuate, you can diversify your portfolio to help smooth out the ups and downs. Diversification spreads your assets among a range of different quality investment vehicles. This means your personal investment success isn’t tied to one investment.

A well diversified portfolio includes

• Cash and cash equivalents
• Fixed income investments like bonds, mortgage funds and GICs
• Growth and income investments such as dividend or balanced funds
• Growth investments such as mutual funds that offer the chance for greater capital appreciation

Watch your weight

You also need to diversify your investments within each category. No more than five percent of your overall portfolio should be in any one company and no more than 25 percent of your overall portfolio should be invested in any one fund.

In your investment plan you should outline what percentage of your portfolio should be allocated to each of the above categories. Every three to six months you should re-examine your portfolio and make sure that it still within the ranges defined by your plan. If they’re not, rebalance and stick to your plan.

Diversification and sticking to your asset allocation does not guarantee a profit, but it will serve to minimize your losses when things go badly.

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Investment success depends on buying and holding quality investments in a well-diversified portfolio. My last post discussed the importance of developing an investment plan. The quality and success of this plan also depends on the quality of the investments you own. A long-term approach to investing is the best way to take advantage of growth opportunities and to minimize certain investment risks. This takes both time and discipline.

Anatomy of a quality investment

When buying bonds, it’s important to focus on those rated investment grade. When buying stocks, no single attribute defines quality, but, generally speaking, you should look for companies that are well-managed with long track records of growth and performance. Another thing to look for in quality stocks is a regular history of dividend payout.

Mutual funds and segregated funds, with reasonable fees, that own these types of stocks and bonds are also quality investment vehicles. When selecting a fund, it’s best to look for funds with a 10-year track record and ones that don’t hold the top performing spot for the previous year. It’s likely that the fund managers took a lot of risk to reach those returns and the level of risk means that those returns are likely unsustainable. Any fund you select should fit into your long term investment plan.

Aggressive investments can be appropriate for some investors, but more often than not they shouldn’t make up an entire portfolio.

The golden rule

The golden rule for investing: If it sounds too good to be true, it probably is.

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You shouldn’t jump into the investment world right away. First, you need to establish a solid insurance portfolio of life, disability and critical illness insurance. Second, you should establish a liquidity fund. Third, you should get rid of debt. Once you’ve moved through these three steps, then you can start developing an investment plan.

The stock and bond markets offer hundreds of attractive investments every day. The tricky part about investing isn’t identifying an attractive investment; it’s identifying what you should own. The most important factor in determining what investment you should own is your long-term objectives.

Write it down

You can easily find investments that will help you pay for your child’s education or your retirement in 10 or 20 years. Many people will abandon quality investments if there is a temporary decline in the stock market. That’s why a written plan is so important.

Successful investing requires specific objectives and steps for achieving them. It also requires discipline and more than a little patience. A written investment strategy can help provide all of these.

Stay focused

This written plan should define your long-term goals, investing time frame and risk tolerance. Use your strategy to guide your investment decisions and your written plan will help you to stay focused. A written plan will also help you say no to potentially speculative investments that might become temporarily popular.

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