What to do about common stocks
Many investors try to deal with the uncertainty of investing by diversifying. But there’s more to sound diversification than simply buying a variety of stocks. After all, a grab-bag approach to investing may result in a heavy concentration in a few economic sectors.
That’s why we think you’ll be better off if you pay attention to economic sectors when it comes to choosing stocks. This approach helps you gain only those amounts of exposure you want to the important areas of the economy.
Generally speaking, most stocks fall into one these five sectors, or broad economic categories: financial sector stocks, utilities, manufacturing stocks, consumer goods stocks and resources. Over the years, we’ve found that Canadian financial stocks, such as the big bank stocks, and utility stocks generally involve below-average risk. Manufacturing and resources, on the other hand, involve above-average risk. The consumer sector is somewhere in between.
Sector investing, then, lets you diversify and balance your holdings to achieve your desired exposure to the various economic sectors.
What to do about mutual funds
Continue to add to funds you currently hold, especially those in your portfolio with weak short-term records. They’ll be back. Among the funds listed in the table below, Altamira Income stands out as one with a weak short-term record.
As long as you have your time horizons properly thought out, investing now will not be a problem. By that we mean don’t invest in stock funds unless you have at least five years to hold. And at five years, consider only the most conservative of stock funds — those with large-cap holdings and those most broadly diversified.
For the most part, these are the types of funds you’ll find in the table below. Only the iShares S&P/TSX 60 Index Exchange-Traded Fund has a diversification problem. That’s because the index it tracks is heavily weighted with financial and resource stocks. So if you hold this ETF, be sure you include other, more diversified funds in your portfolio, too. In particular, make sure you include U.S. and international equity funds as well. They give you geographical diversification.
Click below thumbnail to enlarge chart for Recommended Common Stocks
Click below thumbnail to enlarge chart for Recommended Mutual Funds
Money Reporter, MPL Communications Inc.
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