Mixing up your investments with a diversified retirement account

Deciding how to invest your retirement savings can be challenging when markets fluctuate. One thing most financial professionals agree on is that diversifying—or mixing—your retirement investments may help you build your savings and manage risk over the long term. If you’re ready to invest in your retirement plan, here’s what you need to know about diversification.

What’s diversification?

Experts recommend investing in a mix of investments so you’re not too concentrated in any single investment. This is known as diversification. It means dividing your money among a variety of investment types—or asset classes—so you don’t put all your eggs in one basket. 

Diversification means investing in some assets with higher risk and greater growth potential, some assets with lower risk and lower growth potential, and some assets with different risk factors, so that if some decrease, you have a better chance that others will hold their value.

Diversification doesn’t help you pick the single best investment, but it can help your overall asset balance if you have a fund that performs poorly in the short term. Considering a combination of investments with varying risk and reward profiles can help reduce drastic changes in account value over time.

Asset mixes to consider for your retirement

If you have a lot of investment options to choose from in your retirement plan, think about how you can spread your retirement savings across a few different categories of assets. Choose a combination that works for your financial goals, risk tolerance, and time horizon. 

Here are four categories to consider for your asset mix:

  1. Asset classes
    The three main asset classes—guaranteed, fixed income, and equities—have different levels of risk and return, and in each asset class, you can choose from different types of investments. 
  2. Industries/sectors
    Look at investments across various industries—often called sectors—such as technology, healthcare, real estate, and energy. By investing in multiple sectors, you could capture the upside when specific industries perform well and help limit your downside when they don’t.
  3. Company size
    Think about picking companies of varying sizes and business tenure. Large, established companies may offer stability, while small, newer firms trying to grow their business may provide upside potential.
  4. Geographical regions
    Investing in companies from throughout the world can provide opportunities that aren’t available in this country and could help spread the risk of holding Canadian-only investments. These can include regional funds, emerging-market funds—those specializing in countries with developing economies—and broad-based funds that span various parts of the globe. Keep in mind that international investments can expose you to geopolitical and exchange rate risks.

To diversify your savings, you should consider all four of these categories, among others. You’re not putting all your savings in one investment because no single investment has consistently high returns year over year.

In deciding how much money to put in each, consider your willingness and ability to take on risk and how much time you have until you need the money. Combining investments with varying risk and reward profiles can smooth out your investment returns over time. 

How can you diversify in a recession?

A recession may not be an ideal time to move funds around, but if there’s a recession, it may be a good time to think about derisking and diversifying your investments as the market settles. 

There are two ways to accomplish this:

  1. Creating a diversified retirement account can help you avoid large fluctuations in value and continue to build your retirement savings over time. You may need to rebalance your investments from time to time to maintain your desired mix because the market is constantly changing.
  2. Investing in a target-date fund or a target-risk fund, a portfolio that’s managed and rebalanced by professionals to help meet your objectives, can help keep your investments diversified with minimal effort on your part.

It’s natural to feel uncertainty when markets fluctuate but, remember, the key part of investing for the long term is time in the market, not timing the market. 

Do you have the right mix for your retirement?

Diversification doesn’t guarantee a profit or protect against a loss, but it can help reduce your risks over the long term. It could help smooth out your investment returns over time by choosing a mix of higher risk and reward investments—such as stocks—and lower risk and reward investments—such as bonds. To help reduce the risk of market fluctuations, create a diversified portfolio that holds different asset classes. 

Are your retirement savings invested in a diverse mix of investments? A financial advisor can help you choose the right mix.

The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.

Diversification does not guarantee a profit or eliminate the risk of loss. There is no guarantee that any investment strategy will achieve its objectives.