Create A Well Diversified Portfolio to Manage Your Risk
Diversifying your portfolio is important because sudden market corrections can be devastating if your assets are too heavily weighted in one sector or company. It reduces your risk. However, this gets complicated when your tax strategy means holding different investments within a few different accounts. You need an approach that prioritizes diversity for best results.
Why is diversification important for investing?
Despite your wish that every investment should grow steadily and strongly, there can be periods when some holdings perform poorly. You need to protect against a potential decline. Diversification ensures you have a good mix of investments across several asset classes that perform in different ways. It reduces unwanted risk to your capital, preventing your investments from being heavily weighted in a single company or sector.
Protecting yourself from investment risk
All investing comes with risk. Your strategy will be determined by your comfort level: some investors prefer low risk; some pursue asset growth aggressively and are willing to take a higher risk. Strive to create a mix of assets that fits your personal goals and preferences. Some investments will perform dependably but conservatively; you can include others for their higher potential growth. Your personal portfolio should reflect your investing comfort level.
Plan investing to avoid tunnel vision
A diversified portfolio helps protect your investment strategy. A loss in one investment can be offset by another that is performing well. But when your tax strategy means holding investments in different vehicles, such as a Registered Retirement Savings Plan and a Tax-Free Savings Account, the tendency is to appraise these separately. Instead, review your investments collectively with an eye to proper diversification. Peruse your investment reports together, regardless of whether they are held in a tax savings vehicle or not.
Taxes and investing – take a holistic approach
Ensure diversification takes priority. Treat this issue separately from your tax strategy. Regardless of which account your investments are in, develop a mix of mutual funds, fixed-income securities, equities, and cash suited to your personal goals and risk tolerance. Manage your pool of assets as one lump sum of money; plan your approach; and then place them into the account that offers the best tax treatment.
Protect yourself from risk with a diversified investment strategy. Sit down with your Financial Advisor to assess your current portfolio.