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The Don't Put All Your Eggs in One Basket Principle
Diversification is the investment strategy of spreading your money across different types of investments to reduce risk. It's based on a simple idea: when one investment goes down, others may go up or stay stable, protecting your overall portfolio.
Think of it as not putting all your eggs in one basket. If you drop that basket, you lose everything. But if your eggs are in multiple baskets, dropping one won't be catastrophic.
Types of Diversification
Asset Class Diversification
Spreading investments across different asset types:
- Stocks for growth potential
- Bonds for stability and income
- Cash or GICs for safety
- Real estate for inflation protection
Geographic Diversification
Investing in different countries and regions. While Canadian investments have tax advantages, holding international stocks protects you if the Canadian economy underperforms.
Sector Diversification
Spreading across different industries—technology, healthcare, financials, energy, and more. This protects you from sector-specific downturns.
How ETFs Make Diversification Easy
Exchange-Traded Funds (ETFs) offer instant diversification. A single Canadian equity ETF might hold shares in hundreds of companies across multiple sectors. This means:
- Broad market exposure with one purchase
- Lower costs than buying individual stocks
- Professional management without high fees
- Easy rebalancing
đź’ˇ Note: All-in-one ETFs like VBAL or XBAL combine stocks and bonds in a single fund, making diversification even simpler.
Common Diversification Mistakes
- Over-diversifying with too many similar funds
- Ignoring international markets entirely
- Concentrating too heavily in one sector (like Canadian banks)
- Not considering your other assets (like real estate or pensions)
The Bottom Line
Diversification won't prevent all losses, but it can significantly reduce the impact of any single investment performing poorly. For Canadian seniors, this protection is especially valuable—you have less time to recover from major portfolio losses.
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About Maple Wealth Guide
Maple Wealth Guide is an independent Canadian financial education website. Our team of educational writers researches and explains investment concepts, retirement-related topics, and personal finance information for Canadians aged 50 and over. We are not licensed financial advisors and do not provide personalized recommendations. All content is for educational purposes only.