Key ingredients for diversifying your portfolio

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5 min.

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When the markets look like a roller coaster, it’s normal for your peace of mind to be a bit shaken. Find out how a well-diversified portfolio can help you navigate through these cycles and not give in to panic.

A turbulent post-pandemic period

A period of economic uncertainty, volatile markets or high interest rates can limit your range of investment options by forcing you to tighten your finances and avoid risky investments to protect your assets. In situations like this, guaranteed investments and other safe investments become very tempting.

This is what happened in 2022 and 2023, as the COVID-19 pandemic was ending. Guaranteed investments, like guaranteed interest funds (GIFs) and high interest savings accounts, became very popular. These investment options are a safe bet because they are risk-free and offer stable returns.

In the second half of 2023, some investors started to think about the “post guaranteed investment period.” That might be the case for you. The idea of gradually re-entering the fund market started to emerge and, in some cases, even became very attractive.

Dividend funds are an interesting option that can increase a portfolio's potential return while retaining a stable income component. Paired with guaranteed investments, they can be an effective factor in a diversification strategy, crucial for creating stability and growth.

At the end of 2023, the markets began to soften and a possible reduction in key rates appeared on the horizon. These economic conditions create a favourable opportunity to consider bond funds and dollar cost averaging to further diversify your portfolio. Your financial advisor can help you evaluate these options and determine whether they might be a good fit for you.

Zoom in on bond funds

Bond funds are often an excellent way to take advantage of falling interest rates. They might be for you if you want to:

Invest in the market while limiting your risk
Diversify your investments
Achieve a certain return potential and stability
Protect your capital
Generate interest income

These funds can offer opportunities for capital gains, since bond prices are inversely correlated with interest rates. This means that bond yields are directly linked to interest rates: each change in rates causes the price of bonds to fluctuate—they tend to rise when rates fall and fall when rates rise.

In the context of an economic slowdown, bond fund managers can easily adapt to changing markets, notably by extending or reducing the duration of bonds. They can also improve fund performance by adding calculated risk or hedging strategies to portfolios. They can even use derivatives to help support their strategies.

Bond funds also benefit from active portfolio management, which helps managers outperform the market by targeting the best-performing bonds (based on statistical tests and historical data).

You should also note that if interest rates rise temporarily, bond fund managers can still actively increase the return on your investments by periodically investing new capital in securities that offer better interest income.

Periodic investments: a winning strategy

Making periodic investments in segregated funds can help you take advantage of market volatility.

Dollar cost averaging (DCA) is a strategy that lets you enter the market gradually. Periodically investing fixed amounts in funds is an excellent way to reduce the risk associated with market fluctuations at the time of purchase.

This strategy also helps to reduce the chance that you'll regret having bought at the wrong time and the fear of having made a mistake, avoiding the effects of the investor emotions cycle.

This approach can help you navigate the world of segregated funds more confidently, while increasing your potential returns. It can be particularly beneficial if you have invested a large proportion of your savings in GIFs or HISAs and you don't want to miss out on the opportunities offered by these funds.

What is the best investment strategy for you?

There is no one-size-fits-all answer. The ideal strategy for you, whether for financial products, investment options or diversification, is one that takes into account your needs, your situation and your investor profile.

However, investment diversification is an important ingredient in ensuring that your overall return is less affected during periods of stock market turbulence. And don’t forget that markets are cyclical and that the key is to know how to make the most of each opportunity.

Talk to your advisor. Your advisor is the best person to provide guidance and help you achieve financial wellbeing.