How to Build a Diversified Investment Portfolio in Canada

Creating a diversified investment portfolio is considered one of the smartest ways to grow wealth while managing risk as a Canadian, especially given the unique financial landscape in the country. The S&P/TSX Composite Index is heavily tilted towards financials and energy, and there are endless opportunities in the global market to capitalize on, thus diversification is the key to success in the long run. This guide will take you through the steps you can practically follow to diversify your investment portfolio in Canada, with tax-advantaged accounts, low-cost ETFs, and global portfolios, whether you are a novice or an experienced investor. Let’s get into the details of how you can make a portfolio that will stand the test of time.

Why Diversification Matters

Diversification minimizes risk by allocating your investments across distinct asset classes, sectors, and geographies. An investment portfolio that is too concentrated on Canadian energy stocks, for instance, might experience a blow during a period of declining commodities.  Various research organizations in Canada suggest that more stable returns have been realized over time with diversified portfolios as opposed to concentrated portfolios.  

A typical trap in Canada is home bias, i.e., excessive investment in home markets. According to CPP Investments, the Canadian stock market comprises only 3 percent of the total equities. Diversification across the world would help you access growth in other industries such as technology or healthcare, which are not well represented in Canada. Diversification also acts as a cushion against currency fluctuations and economic changes, thus making your portfolio resilient. For those interested in streamlined diversification, platforms like Wealthsimple can simplify the process. Learn more in the guide on diversifying your portfolio with Wealthsimple.  

Key Asset Classes for Canadian Investors

A diversified portfolio is a combination of different asset classes that is specific to your risk tolerance and objectives. The following are the key alternatives of the Canadians:

• Stocks: Canadian blue-chip stocks (e.g., Royal Bank of Canada, Shopify) provide stability and growth. To get international exposure, look to U.S. or emerging market stocks through Canadian Depositary Receipts (CDRs) or ETFs.
• Bonds: Government and corporate bonds will yield income and stability. Invest in Government of Canada notes to be safe or in corporate bonds to get higher yields.
• ETFs: Asset allocation ETFs, such as Vanguard VBAL or iShares XBAL, are a quick and easy way to get diversification at low cost. They mix stocks and bonds in a single fund, which is suitable for passive investors. For socially conscious investors, explore options covered in the article on the best SRI robo-advisors in Canada.  
• Real Estate: Real estate investment trusts (REITs) are a way of participating in property without owning the underlying assets; an example includes RioCan REIT. 
• Commodities: Gold or other commodities can be used to hedge against inflation, which are available through ETFs such as iShares Gold Trust.

Having a balance in these assets makes your portfolio perform well in different market environments. As an example, bonds can stabilise returns when stocks fall, and commodities hedge against inflation risks.

Steps to Build a Diversified Portfolio

Here are the steps you can take to build a diversified investment portfolio in Canada:

1. Evaluate Your Risk Preference and Objectives

Identify your time horizon and risk tolerance. Early investors might prefer to invest in growth-focused portfolios (e.g., 80% equities, 20% bonds), whereas older investors may need to focus on income (e.g., 40% equities, 60% bonds). Assess your risk profile with the use of the Canadian Securities Administrators’ tools. 

2. Asset Class Allocation

An example of a balanced portfolio would consist of 60 percent equities (split between Canadian, U.S., and international stock), 30 percent bonds, and 10 percent alternatives (e.g., REITs or gold). Be flexible according to your objectives. To keep it simple, consider all-in-one ETFs such as Vanguard VGRO, which allow automatic diversification into thousands of securities.    

3. Leverage Tax-Advantaged Accounts
Contribute as much as possible to Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs), or First Home Savings Accounts (FHSAs). TFSAs are the best to grow tax-free, whereas RRSPs are tax-deductible. For a deeper dive, check out the guide on understanding TFSA types for smarter saving. Find out more about these accounts at Canada.ca.

4. Diversify Geographically and by Sector

Avoid home bias by investing or allocating assets beyond Canada. ETFs such as iShares MSCI World (XWD) give exposure to the world. In Canada, diversify in sectors such as financials, energy, and technology to reduce concentration risk. 

5. Rebalance Regularly

Markets change, and therefore, you need to rebalance your portfolio once a year or when your targeted asset classes deviate significantly from predetermined allocations (e.g., equities have grown to 70% from 60%). Rebalancing keeps your preferred level of risk and captures gains.  For automated rebalancing, explore the article on automating your retirement savings in Canada.   

Tools and Resources for Success

Obtaining the right tools and advice can help in building a diversified portfolio:

• Robo-Advisors: Websites such as Wealthsimple or Questwealth use low-cost automated portfolio management that fits your personal risk tolerance. They are suitable for beginners or inexperienced investors.  Curious about the differences? Read the comparison of robo-advisors vs. traditional advisors.  
• Financial Advisors: To get custom advice, seek the services of a certified financial planner.  To search for a certified financial planner and find one that meets your needs, visit FP Canada.  
• Investment Platforms: There are discount brokerages, such as Questrade or BMO InvestorLine, which give access to ETFs, stocks, and bonds at low costs. 
• Educational Resources: Explore the Bank of Canada Financial System Hub to gain insights on market trends.

To ensure that you are on track, look at the performance of your portfolio regularly using the various financial tools available on reputable websites.

Final Thoughts

Creating a diversified investment portfolio is one way that allows you to build your wealth confidently, balancing risk and reward by allocating your assets strategically, investing in tax-smart accounts, and investing globally. You can survive the market fluctuations and create a secure financial future by evaluating your goals, diversifying your portfolio among asset classes, and maintaining discipline by periodically rebalancing your portfolio. The next step starts today, whether it is learning about low-cost ETFs, maximizing your TFSA, or speaking with a financial advisor to optimize your plan. Your journey to smarter investing starts now.

Disclaimer: Investing is risky, and you should consult a financial advisor for specific investing decisions.