Diversification
Successful investing means not only capturing risks that generate expected return but reducing risks that do not. Avoidable risks include holding too few securities, betting on countries or industries, following market predictions, and speculating on "information" from rating services. To all these, diversification is the antidote. It washes away the random fortunes of individual stocks and positions your portfolio to capture the returns of broad economic forces.
For many investors, the S&P/TSX Composite Index represents the first equity asset class in a diversified portfolio. Although the S&P/TSX Composite Index is diversified in large Canadian companies, investors can benefit further by adding components. Take, for example, a portfolio that holds just Canadian stocks (S&P/TSX Composite Index), and one that is diversified across Canadian, US, and international asset classes. The diversified portfolio has not only provided higher historical returns, but it has done so with fewer negative quarters.
Dimensional diversifies not only in the amount of securities it holds (thousands) but in the range of capital market strategies it explores and develops. In this way, investors focus on the factors that drive investment returns, reducing excess and undesirable risk.
This is the power of diversification: the whole is greater than the sum of its parts.
| The Benefits of Diversification |
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| In Canadian dollars. Results represent past performance and do not predict future performance. Charts for illustrative purposes only. |
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1Time range represents the longest common time series of data. |
| Canadian Large Cap is the S&P/TSX Composite Index. Canadian Value is the S&P/Barra Canadian Value Index and Canadian Small Cap is the S&P/Barra Canadian Small Cap Index. US Large Cap is the S&P 500 Index. US Value is the Russell 3000 Value Index. US Small Cap is the CRSP 6-10 Index. US Real Estate is the Dow Jones Wilshire REIT Index. International Value is the MSCI EAFE Value Index (net dividends) and International Large Cap is the MSCI EAFE Index (net dividends). International Small Cap is the S&P/Citigroup EPAC Extended Market Index (EMI). The S&P data are provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of Russell data. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Dow Jones Wilshire data provided by Dow Jones Indexes. MSCI data copyright MSCI 2006, all rights reserved. S&P/Citigroup data provided by S&P/Citigroup Global Markets Inc. |
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Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. |