Investing in stocks successfully does not mean that one knows everything or can always predict the future. It means abiding by a few rules that are meant to mitigate and spread the risk of investing.
There’s no better way to mitigate risk than by diversifying. Because the truth is that there are so many variables involved in investing that nobody could get it all right every time. Some beginners might not fully recognize all of this, and so it’s hard for them to ever feel ready to take the plunge.
Let’s take a look at how best to diversify your portfolio so that you can be protected against market shocks and create long-term value.
Diversify across industries
Different industries thrive under different market environments. For example, commodity industries thrive under healthy supply/demand fundamentals for the respective commodities. Banks thrive in the right interest rate/demographic environments. And some industries, like the utility industry, thrive in most environments, as they’re stable and defensive.
So, spreading out one’s investments amongst the different industries gives investors the benefits of diversification. When one industry is going through hard times, a different one may be thriving. In the end, this smooths out and protects investor returns.
A sample portfolio
Diversification amongst industries can look something like the following. Buying Toronto-Dominion Bank (TSX: TD) for exposure to its solid, reliable returns can be an anchor. TD Bank stock pays a consistent, growing dividend and has a stable return profile.
Another stable anchor stock is Fortis Inc. (TSX: FTS), one of North America’s leading utility companies. Fortis stock has increased its dividend for 52 consecutive years and it has provided shareholders with consistent and steady long-term returns.
Adding technology stocks to the mix gives investors exposure to higher upside potential, as the technology industry continues to experience rapid growth rates. For example, CGI Inc. (TSX: GIB.A) is a Canadian IT services leader with a large global presence. The company has grown rapidly and consistently over the last few decades as the world has been digitizing. And this high-growth journey is not over, as artificial intelligence and technological advancements continue at a rapid pace.
Another good addition to your diversification plan is energy company Altagas Ltd. (TSX: ALA), which is benefiting from the growth of the global liquefied natural gas (LNG) industry. Altagas is currently benefiting from record results as global demand for Canadian energy exports is rapidly increasing. In the company’s latest quarter, earnings per share (EPS) increased 15% to $0.31 and the company increased its guidance.
Focus on the long-term. And on quality
Beginning one’s investment journey with this diversification focus will allow you to build a resilient portfolio that can ride the ups and downs of the market. Of course, throughout all of this, keeping a long-term outlook without getting bogged down by short-term noise is also key.
Finally, investors are advised to own companies that have real earnings, strong cash flows, healthy balance sheets, and strong competitive positions. All of these characteristics increase the resiliency of any given stock. Again, we want to be protected against market shocks.
The bottom line
This article gives a brief introduction on how to start thinking about building a diversified portfolio to protect yourself against market shocks. The key is to spread your investments across different industries while always focusing on quality companies.