Research has shown that successful investing involves not only choosing the right investments, but the right combination of investments. In fact, your investment mix, particularly the mix between income and growth investments, is the single most powerful factor driving your overall return.
Use key tools in asset allocation planning
One of the key tools in asset allocation planning is the efficient frontier graph. It illustrates the trade-off between risk and return when two investments are mixed in varying amounts.
Analyzing Canadian bonds and equities over the past forty years has revealed two important lessons. The first is critical for conservative investors: combining bond and equity investments is actually less risky than investing solely in bonds. This occurs because the benefit of diversification achieved by combining different types of investments more than offsets the added risk of equities in the portfolio. The second lesson is for more aggressive investor who seek to maximize returns by investing solely in equities. By adding 20% bonds to an equity portfolio you will significantly reduce portfolio risk with only a slight loss of return potential.
Doing this type of analysis requires extensive testing and sophisticated computer technology. This scientific approach is available to you when working with a financial advisor.
Diversify your portfolio for stability
When you invest in just one type of investment, or in investments that are very similar to each other, your investment returns will tend to fluctuate more widely. The key to stabilizing returns is to combine a variety of investments with different characteristics.