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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