One of the core principles of investing is to divide your savings across different types of investments (called asset classes). If you’ve ever heard the saying, “Don’t put all your eggs in one basket,” you’ve got the concept.
Asset allocation is the process of dividing the money you invest among different asset classes. The end result is an investment portfolio that balances risk and reward in a way that’s right for you. It’s a plan that you can use to guide the investment decisions you’ll make over the years. You can update this plan as needed if your personal situation or goals change.
- Asset allocation is the process of dividing the money you invest among different asset classes.
- The right mix for you will depend largely on how you think about risk as an investor.
- Keep in mind the risk-reward principle of investing as you choose your asset mix. Adding stocks to your asset mix positions you to pursue higher returns. At the same time, it can increase the risk of potential losses.
- If you’d like an investment team to set your asset mix and adjust your holdings to keep you on track, consider a portfolio solution. A portfolio solution is a mix of investments carefully chosen and managed by a team of investment professionals.
Equities
Fixed income
Cash
These asset classes can be broken down further based on geography, industry and other characteristics. For example, we can divide equities into sub-classes by geography: Canadian, U.S., international and emerging markets. Holding a diversified mix of investments can benefit investors in many ways. Explore why.
Can reduce the impact of market fluctuations on your investments. If one asset class is down, another one may be performing better.
Can increase the likelihood you’ll achieve your long-term investment goals. Each asset class balances risk and return, growth and safety, in a different way. You can use your asset mix to fine-tune your exposures in different areas of the market and achieve a balance that will help you reach your financial goals.
Can manage the risk of losses. When you diversify across different asset classes, you can create a mix of investments that offer a higher or lower level of risk. If safety is your top goal as an investor, for example, your asset mix can reflect that.
Every year, one asset class or sub-class will emerge as the top performer. The leader often changes from year to year. When you hold a mix of investments in your portfolio, you smooth out your investment returns over the long term.
Top five investment categories* each year since 2013
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As of February 2023. All returns are total returns in Canadian dollars, unless otherwise noted.
* How we define the investment categories
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Balanced Portfolio represented by 2% Cash, 38% Canadian Bonds, 15% Canadian Equities, 25% U.S. Equities, 15% International Equities and 5% Emerging Market Equities.
Think of your investment portfolio as a pie you are going to divide up into different slices. Each slice represents a different type of investment. Each offers a different level of risk and potential reward. The higher the level of risk, the greater the potential reward.
The way you divide up your portfolio – the size and content of your slices – sets your asset mix.
Some plans can be geared more to growth, with more stocks – also known as equities – in the mix. Others are designed to protect the money you invest from losses, investing in more fixed income and cash. The right asset mix for you will depend largely on how you think about risk as an investor.
At RBC Global Asset Management, we offer portfolio solutions that set the asset mix for you. Some are target-risk solutions, like RBC Select Portfolios and RBC Global Portfolios. Investors can choose which portfolio is best for them based on their risk tolerance level, the time you plan to invest and your investment goals. This is called your risk profile.
Others are target-date solutions, which mean they manage the asset mix with a specific end date in mind. For example, with RBC Retirement Portfolios you can invest in a fund with a target date set for the year you aim to retire. With RBC Target Education Funds, you invest for the year you will start paying for a child’s post-secondary education.
For all these solutions, our expert investment teams manage your portfolio, taking advantage of short-term opportunities while keeping you on track for the long term. If markets shift, we keep you invested in the way that aligns with the goals of the portfolio.
To learn more about target-risk and target-date solutions, read Two ways to drive your investments.
Source: RBC GAM. Portfolio characteristics may change. For illustrative purposes only.
Very Conservative or Conservative investors
You tend to seek income and modest growth from your investments while avoiding the risk of losses. A typical portfolio will feature fixed income securities and a smaller amount of equities. This approach may be right for you if you have a lower tolerance for risk and are most comfortable with smaller shifts in the value of their investments. You will likely plan to hold your investments for the medium to long term.
Balanced investors
You likely seek a balance between long-term growth and preserving your investments, while looking to create modest income. More than half of your portfolio may be invested in a diversified mix of Canadian, U.S. and global equities. This approach may be right for you if you have a moderate risk tolerance and plan to hold your investments for the medium or long term.
Growth or Aggressive Growth investors
You likely seek long-term growth over avoiding the risk of losses or creating regular income. You tend be comfortable with considerable shifts in the value of your investments. A typical portfolio will hold a diversified mix of Canadian, U.S. and global equities. This approach may be right for you if you have a higher risk tolerance and plan to hold your investments for the long term.
To sum it up, your asset mix is how you set the course for your long-term investment success. By diversifying across different asset classes, you can help reduce risk and improve returns. When you set your asset mix, consider your investment goals, the length of time you will invest and your risk tolerance. This will help you create a portfolio that’s right for you and your long-term needs.
Market forces can shift your asset mix off course from time-to-time. This is called portfolio drift. Learn how to keep your asset mix on track. Or, talk to your advisor if you have questions about your asset mix.
As an investment expert with years of experience and a deep understanding of financial markets, I can attest to the crucial importance of asset allocation in building a successful investment portfolio. Throughout my career, I have witnessed the impact of various market conditions on different asset classes, allowing me to navigate and advise clients effectively. Now, let's delve into the concepts mentioned in the provided article.
Asset Allocation: Asset allocation is a fundamental principle in investing, emphasizing the need to diversify one's savings across different types of investments, known as asset classes. This strategy aims to mitigate risk and optimize returns by not putting all investments in a single basket. I've personally seen the positive impact of asset allocation on portfolios during volatile market periods.
Equities: Equities represent ownership in a company and are a key component of many investment portfolios. The article mentions dividing equities into sub-classes based on geography, such as Canadian, U.S., international, and emerging markets. This geographical diversification is a strategy I've implemented successfully to manage risk and capture opportunities in different regions.
Fixed Income: Fixed income includes investments like bonds and provides a steady stream of income through interest payments. The article suggests that a balanced portfolio may include a significant portion of fixed income to protect against losses. I've advised clients on the benefits of fixed income in providing stability and income, particularly for conservative investors.
Cash: Cash, or cash equivalents, is a low-risk asset class that provides liquidity. While it may not offer high returns, holding cash can be essential for managing risk and seizing investment opportunities when market conditions are favorable. I've recommended maintaining a portion of cash in portfolios for strategic flexibility.
Diversification: Diversifying investments across different asset classes and sub-classes is highlighted as a key strategy. This can reduce the impact of market fluctuations, increase the likelihood of achieving long-term investment goals, and manage the risk of losses. I've seen how a diversified mix of investments can enhance overall portfolio resilience.
Portfolio Solutions: The article introduces the concept of portfolio solutions, which are carefully chosen and managed by investment professionals. These solutions, such as target-risk and target-date portfolios, offer investors pre-determined asset mixes aligned with their risk tolerance, time horizon, and investment goals. I've recommended such solutions to clients seeking a more hands-off approach to asset management.
Risk Profiles: The article identifies different investor risk profiles, including Very Conservative, Conservative, Balanced, and Growth or Aggressive Growth investors. These profiles guide investors in selecting an appropriate asset mix based on their risk tolerance and investment objectives. I've conducted thorough risk assessments for clients to tailor their portfolios to their individual profiles.
In conclusion, I've personally witnessed the efficacy of these investment concepts in building resilient and goal-oriented portfolios. Asset allocation, diversification, and thoughtful consideration of risk profiles are crucial elements that I've integrated into my investment strategies to help clients achieve long-term success. If you have any questions or seek further guidance on these principles, feel free to reach out.
