What does a diversified portfolio look like? A well-diversified portfolio balances risk by spreading investment holdings out across industry sectors and more

What does a diverse portfolio look like? It’s a question we hear often from the Pat McKeough Inner Circle. We believe a well-diversified portfolio has a few specific qualities, including holdings spread out across most if not all of the five main economic sectors, geographic diversification, both conservative and more-aggressive holdings, and both market leaders and laggards.

All in all, you will improve your chances of making money over long periods, no matter what happens in the market, if you diversify your holdings as we recommend, and so successfully answer the key question: what does a diverse portfolio look like?

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What does a diversified portfolio look like? Holdings in the five main sectors

As we recommend to the Pat McKeough Inner Circle, we believe you spread should your money out across most, if not all, of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

Here are some tips on diversifying your stock portfolio by sector:

• When it comes to answering the question what does a diverse portfolio look like? remember stocks in the Resources and Manufacturing & Industry sectors expose you to above-average share price volatility.
• Stocks in the Utilities and Canadian Finance sectors, however, entail below-average volatility.
• Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors to successfully answer the question what does a diverse portfolio look like? The proper proportions for you depend on your investment temperament and circumstances.

The Pat McKeough Inner Circle, like most conservative or income-seeking investors, may want to emphasize utilities and Canadian banks for their high and generally secure dividends. Regardless, it always pays to look closely at a company’s recent acquisitions and the risk associated with that growth strategy.

More-aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks.  However, at the same time, you’ll want to spread your Resource holdings out among oil and gas, metals and other Resources stocks for diversification within the sector, and for exposure to a number of areas.

What does a diverse portfolio look like? Balanced across geography

As it’s a mistake to focus your portfolio on a company that relies on a number of recent acquisitions for growth, one of the worst things you can do is invest so that your portfolio would suffer a great deal due to a localized downturn in any one city, province or state. Good portfolio management also means balancing your investments geographically.

Like the Pat McKeough Inner Circle’s most successful investors, you should avoid focusing your portfolio on any one country or region. And a lower-risk way to add international exposure to your portfolio is to hold multinational U.S. stocks such as, say, IBM, McDonald’s and Walmart. We cover all three of these companies in our Wall Street Stock Forecaster newsletter.

We continue to recommend that most Canadian investors diversify part of their portfolios (say, 20 to 30%) in well-established U.S. stocks. That’s because the U.S. market features major multinational opportunities that simply aren’t available anywhere else. As well, many U.S. firms are unique world leaders.

Ideally, your portfolio should give you exposure to much of the North American economy, plus substantial international exposure, if only through North American multinationals.

What does a diversified portfolio look like? Includes market leaders and laggards

Market leaders and market laggards both deserve a place in your portfolio. It’s what we preach to the Pat McKeough Inner Circle. Over long periods, high-quality stocks play leapfrog. Some of the lowest-risk, highest-profit buys you’ll ever find are overlooked or out-of-fashion stocks of high investment quality that are coming back into investor favour.

The market leaders of any industry are strongly placed to fend off new entrants and expand their earnings, even in today’s uncertain economy. That enhances their ability to raise their dividends. Market leadership could also be thought of as a “moat,” or a distinct and long-lasting competitive advantage, even factoring the risk of any recent acquisitions.

Examples of market leaders include high-quality blue chip stocks. Blue chip companies are typically defined as firms whose stocks have a national or international reputation for quality, reliability and the ability to operate profitably in good times and bad.

You can still look at top blue chips as the strongest and most secure stocks on the market. So, what does a diverse portfolio look like? It includes Blue chip companies, which almost always possess the following traits:

• Manageable debt
• A history of paying dividends
• Industry prominence if not dominance
• Freedom to serve all shareholders

What does a diversified portfolio look like? Includes conservative and aggressive stocks

Balance aggressive and conservative investments in your portfolio, in line with your investment objectives, and the market outlook–whether positive or, like currently, uncertain.

Conservative investing calls for a healthy sense of skepticism. It involves building a stock portfolio with the goal of achieving steady returns, including dividends, while maintaining a lower level of risk, for example being cautious about investing in companies that rely on recent acquisitions for growth. A conservative investing strategy typically includes the purchase of top blue-chip stocks and other low-risk investments. Conservative investors recognize that some of your most promising investments will disappoint you, and that diversification is a key part of successful conservative investing.

Aggressive investors focus on higher-risk investments that can potentially produce higher returns than more conservative stocks, but also have potential for bigger losses.

As a general rule we recommend that you limit aggressive stocks to a smaller part of your overall portfolio.

You can lower your overall portfolio risk by following TSI Network and using our three-part Successful Investor strategy:

• Invest mainly in well-established companies;
• Spread your money out across most if not all of the five main economic sectors;
• Downplay or avoid stocks in the broker/media limelight.

What has been your approach to building a diversified portfolio? Have you focused on balancing your holdings across sectors, or have you invested more heavily in one or two sectors?

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This article was originally published in December 2021 and is regularly updated.