Dinner Parties and Diversification Have More in Common Than You Might Think
‘Tis the season for friends, family and food! What does that have to do with investing? Glad you asked! As you gear up to host your next holiday meal, we’re serving up a little food for thought on one of the simple principles for investing success: diversification.
The following article, written by Bonny Reichert, first appeared on Inspired Investor Trade at RBC Direct Investing.
Let’s dig in…
It was a dinner party that started with the simple desire to get a few friends together on a Saturday night. I planned a cozy dinner for six and had an elaborate recipe I was eager to try.
Except...my numbers quickly grew thanks to a few off-the-cuff invites and a last-minute visit by friends. My cozy group quickly turned into a robust 15, including two vegans, three teens, one low-fat dieter and one guest who couldn't tolerate gluten.
Suddenly, my original plan to make an elaborate French dish didn't seem like such a great idea. Entertaining can be a bit like investing: you can stick with your original plan and hope for the best (French dish for six who will all eat and enjoy it), but you may not be prepared for any curve balls (extra guests, vegans, low-fat dieters). Whether you're investing or planning a great dinner party, strategy and diversification can be key.
Covering Your Bases
When cooking for a crowd, diversification might look like an array of dishes to please a range of palates. Similarly, when planning your investment portfolio, a well-balanced portfolio can help increase the likelihood of successfully meeting your goals. With dinner, you may offer up an appealing main course, a nice quinoa dish and an interesting vegetable. One component might end up being a bigger hit than another, but you're offering up something for everyone to help cover your bases.
Diversifying your investment portfolio means choosing a mix of assets from three main categories: cash, fixed income and equities, based on what you've determined your investor profile to be. But like not wanting to serve the same single meat, rice and vegetable dish over and over again, a diversified portfolio means that even within these three categories, you may choose to add flavour and variety with a mix of assets from different global markets and industries.
The way you mix your assets depends on the type of investor you are. A secure investor might lean toward fixed-income securities, typically offering lower risk and lower returns. That can include guaranteed investment certificates (GICs), bonds, bond mutual funds or bond exchange-traded funds (ETFs). An aggressive growth investor might turn to equities, which can include stocks, equity mutual funds or equity ETFs. Cash holdings, which can include cash and cash equivalents (such as money-market funds), savings accounts or bonds and GICs exercisable within one year, can offer a stable base and liquidity if access to money on shorter notice is required.
You can further mix up a portfolio according to geographic or economic sectors. There's also room for diversification within specific sectors, as well as by market capitalization — different company sizes can mean varying growth opportunities — and by fund management styles, which can help balance portfolio returns.
With my group of 15, I did end up going with my original plan to serve a fabulous French cassoulet. But I also whipped up a tofu-and-vegetable dish and ordered pizza for the teens. It was a great evening in the end, despite the last-minute scramble. Lesson learned — planning ahead and finding the right mix of offerings can be a recipe for success when it comes to both entertaining and investing.
Bon appétit!
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