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Maximize Your Portfolio’s Diversification

Request a complimentary portfolio review with a Raintree Private Wealth Advisor:

    *Please note Raintree Financial Solutions' strategies are best suited to individuals with portfolios over $200,000.


    Why Diversification is Important

    Increase Rates of Return

    Investing should start with an objective – and in most cases the highest priority is to make a return. When it comes to traditional investing, there are a tremendous amount of investment options to generate a potential return. Increasing sources of return may or may not mean increasing the portfolio’s overall return. That said, investors seeking to increase overall portfolio returns may need to explore new asset types to enhance portfolio returns.

    Tax Planning

    It’s not only important to explore how you will generate return in your portfolio, but also what you’ll be left with after taxes are paid. This can include using registered plan accounts like RRSPs and TFSAs in Canada. It can also include thinking more deeply about the characteristics of your returns. These may include capital appreciation, dividends or interest payments. Know how these will be taxed, may help you plan differently. But did you know that some investments are considerably more “tax efficient” than others – and as your tax planning needs become more significant, this can save you significant money or increase your after-tax returns.

    Managing Risk

    Successful investing is generally measured by how much return the investment made relative to the risk taken. An important measure of risk is the correlation of returns between investments in a portfolio. It can be important to find investments that behave differently to varying economic and market events. Having investments that go up and down at different times will reduce the risk of a portfolio overall.

    Cash Flow Needs

    Diversifying your sources of cash flow allows you to potentially make your overall cash flow more resilient. Though cash flow is one of the forms of potential return in any investment, we’ve broken out the following seven types of cash flow:

    ❑ Employment/active
    ❑ Business
    ❑ Interest
    ❑ Dividend
    ❑ Rental
    ❑ Royalty
    ❑ Capital Gains

    Cash flow diversification can be very important, especially for those drawing on their investment cash flow to meet their lifestyle needs. In our experience, we find few investors can check all the above boxes. By diversifying cash flow sources, you may make your overall cash flow more resilient.

    Investment Options that can Help Diversify your Portfolio

    Public Equities

    Since most people own public equities, you may have to think more deeply about diversifying this part of your portfolio. This could include investing in companies or stock markets in other countries or changing the mix of types, industry or size of companies you are invested in.

    Conventional Fixed Income

    Historically, bonds behave differently than stocks under certain market conditions and over different periods of time. Their values are generally less volatile than equities, so can also smooth out portfolio returns.

    Public Real Estate (REITs)

    These investments diversify a portfolio because they have different characteristics than operating businesses. Typically, they are less correlated to equities and bonds, so may behave differently to certain economic and market factors. We also find that investors gravitate to buying real estate directly, but that may come with significant operating and sub market risks.

    Hedgefunds, Options & Derivatives

    These investments by their nature can have high, low or no correlation to your other investments, and as such can provide significant diversifying benefits within a portfolio.

    Private Equity

    These investments may provide you with access into sectors or industries where there are no publicly available comparables – providing natural diversification to unique return sources. Also, some studies show that private equity may be lower correlated to public equities.

    Private Fixed Income

    With the low interest rates offered by government and public corporate fixed income, private debt may assist you in enhancing the yield in your fixed income allocation of your portfolio.

    Commodities

    Commodity prices fluctuate daily based on supply and demand and may be affected by all sorts of factors including economic, social, weather and a variety of other things. The can often have lower correlation to the overall stock market, but higher volatility, so be prepared that the prices may go up and down frequently.

    Private Real Estate (REITs)

    Private REITs are generally valued based on the underlying real estate held and may be revalued less frequently than public investments trading on a stock exchange. Additionally, developments are often project specific, so you can choose whether you like the investment prospects and whether the project is diversified from your other investments.

    Request a Complimentary Portfolio Review Today

      *Please note Raintree Financial Solutions' strategies are best suited to individuals with portfolios over $200,000.


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