Last week Rob Carrick wrote about the minuscule (1.1% including inflation) returns the Toronto Stock Exchange (TSE) produced over the last 10 years. While accurate it is also demoralizing for many investors. Having a long time horizon is important but 10 years should be enough!
The best way to fight these lack lustre returns is diversification. Canada is a diverse country but our stock market is not. If you invested in a Canadian Index Fund designed to track the TSE over 40% of your money is invested into the financial sector and over 20% into oil and gas. On the under represented side you would only invest 2% in each of technology and consumer packaged goods.
To break this down if you invested $1,000 in a TSE tracking index fund you would have invested:
- $400 in finance
- $200 in oil and gas
- $20 in technology
- $20 in consumer packaged goods
That leaves only $360 in everything else. Based on these weightings some events, such as low inflation and oil prices, will have a large impact on our investments. That is just what is occurring in our market at the moment.
The way to over come these poor results is diversification. Invest in multiple index funds covering many industries, countries, and products. Investing in a US market index fund would increase your consumer packages goods and health care exposure dramatically. A developed Asia Pacific fund will bring services into the mix. This has the added benefit of reducing your exposure to any single country.
Investing in different products will also serve you over the long run. Index funds track stocks, as we just reviewed, but also many financial instruments. I suggest also looking at index funds tracking bonds. These can include either company or government debt.
Read the fund fact sheet before investing to make sure you are not over indexed in any area. If that sounds a little hazy take a minute for a quick index fund refresher.
Keep invest – diversification can be found in many ways check your portfolio for these things:
- Geographic Diversification – Invest in more that just Canada or even North America. In addition to Canada and US index funds look for European, Asian, and emerging markets.
- Sector Diversification – What industries are you in? Pick a number of index funds with different focuses.
- Product Diversification – Consider investing in stock based index funds and bond based index funds. They will balance each other out.
Rob Carrick’s article Hey Canadian Stock Market Thanks for 10 Years of Nothing outlines a few key contributors to the results.