Building your investment portfolio
Avoiding the risk of single-stock investing
It’s not uncommon for self-directed investors to get their start by buying a single popular stock or sector that promises fast growth and big returns.
Placing a bet on a speculative trend like marijuana stocks or cryptocurrencies can be an exciting way to get into trading, but it is a bet. The more you stand to gain in returns in the short term, the more you could lose if things don’t work out. And the direction of any single investment is very difficult to predict in the short term.
For example, if you had bought Bitcoin at the outset of 2017, you would have paid about $1,300 USD, then watched its value soar to more than $17,000 by December.
But if you’d jumped on the Bitcoin bandwagon in December, as many first-time investors did, you would have lost half your money in under six months: at the time of writing (mid-May 2018), Bitcoin was at $8,500.
This isn’t to say you shouldn’t buy trendy stocks: some turn out to be solid long-term performers. But if you’re investing for financial goals like buying a home, putting your child through university, or retirement, you need to be an investor, not a gambler. You need a well-rounded investment strategy and a portfolio that includes a wide selection of different investments. You can still place a few bets on more speculative assets, but they should play a secondary role.
Core & Explore
This way of thinking about your portfolio is sometimes called “Core & Explore.”
It means that the core of your portfolio is structured around high quality investments. Mutual funds or exchange-traded funds are often a great way to gain access to a wide range of asset classes. Stocks provide growth potential, but can be volatile. Fixed income investments (bonds) provide income and stability—they’re a buffer against stock market volatility, and a hedge against stock market corrections. Other kinds of assets such as cash, real estate and precious metals can be part of the mix, and professionally managed funds also allow you to gain exposure to a range of industries and regions. That diversity of different investments allows you to participate in assets that are appreciating, while insulating your portfolio against shocks to specific corners of the market.
This is the art of diversification—not putting all your eggs in one basket. And it’s at the root of sound investment strategy.
As a rough guideline, that diversified core of your portfolio should comprise 80-95% of the value of your investments.
The way you weight these three elements to build your portfolio’s core will depend on your investing goals, timeline and tolerance for risk:
- What are you investing for—growth, income, or a combination of both?
- When will you need your money?
- What is your financial capacity and emotional tolerance for potential losses?
If you want or need high growth and you’ve got a short timeline, you’re going to assume high risk of permanent loss. That degree of risk may or may not be appropriate. But if you need high growth and you have a long timeline, as most new investors do, then you can be more aggressive in how you structure your portfolio.
A common mistake new investors make is to be too aggressive when they have a shorter timeline, or too conservative when they have a longer one. As a general rule, a more conservative portfolio will deliver smaller returns, but more reliably over a longer period. These can be helpful questions to consider when putting together your portfolio’s core.
Once you’ve built the backbone of your portfolio with a selection of assets that makes sense given your goals, timeline and risk tolerance, you may feel comfortable adding some more speculative investments. That’s where the “explore” side of your portfolio comes in: investment ideas that have piqued your interest, hot stocks, start-ups, or sectors that are personally important to you, like green technology (or craft beer).
These areas may carry more risk, and it’s important to understand and ensure you’re comfortable with what that risk is before investing. But the advantage of a “core and explore” approach is that this riskier assets only occupy a small part of your portfolio, and are offset by the rest of your funds being in more balanced, reliable assets—helping you to steadily grow your wealth over time.
ETFs and mutual funds: The building blocks of a diversified portfolio
Ready to diversify your portfolio? The easiest, most popular and cost-effective way to build out your portfolio’s core is with mutual funds and ETFs. These are professionally selected and professionally managed baskets of investments that give you exposure to dozens, hundreds or even thousands of companies or issuers at once, achieving excellent diversification across asset classes, industries and regions.
If you’re new to the world of mutual funds and ETFs, you’ll find that there are thousands of each to choose from. Qtrade Investor can make the process more manageable with its Mutual Fund and ETF Screeners, both of which can be found under Investment Tools when you log in to your account. Qtrade Investor also offers 100 commission-free ETFs.