Savings can be a quite daunting exercise especially to the rookie investors. The question that learners new to investing in Canada have is how they can minimize risks while at the same time improving on their returns. Among these, diversification becomes a key strategy that would assist in the meeting of these goals through dispersing the investments across the available assets.

Thus, diversification not only ensures protection against unfavorable fluctuations of the market but also actively utilizes the increase in different types of assets. Now I will bring you more details of two out of them that could help to build a good diverse portfolio. These strategies include; Allotting the investment portfolio across assets, geographical spread, which are noble strategies for these inexperienced investors.

Asset allocation strategy

Asset allocation is the identification of the whole portfolio and separating it into smaller categories known as asset classes, for instance, equities, fixed income and cash. This strategy can work to some extent of managers depending on their risk taking abilities, financial targets, and the duration which they intend to invest.

To start the process of asset allocation, therefore, it is important to consider risk tolerance level. Those who are more risk-averse would give more to bonds and cash, while those that can afford to take more risks would invest more in stocks. Some of the most recommended asset splits, particularly for novices include the Bogleheads’ 60/40 proposals that entail 60% of the portfolio invested in the stock and 40% in bonds.

Advantages of asset allocation

Asset allocation has one major advantage, and this is that it helps in managing the risks involved in investors’ portfolios. Through diversification of investment, investors distribute their monies in various classes of investment, thus lowering the effect of decrease in any given class. This diversification is even useful in preserving more obtainable levels of returns that are stable over the fluctuations of the market.

The other advantage is that different clients need to be served in different ways, and this means that investment strategies are also different for every single person. Asset allocation provides the investors with the freedom to meet their financial objectives depending on the specifications of the risk-proportions they are willing to incur.

Challenges of asset allocation

However, there are also some weaknesses of asset allocation as follows: One major limitation is the regularity of monitoring and recalibrating the model, which could take a lot of time. If not rebalanced from time to time, portfolios may drift away from the initially set investment strategy and thus the level of risks may rise.

The next issue that has to be addressed is when one has to invest in more complex structures which pertain to various types of assets. To the inexperienced investors, the process of choosing proper assets and the proportions for portfolio diversification can be quite challenging. It is especially essential to know the nature and behavior of different investments; however, this could take a lot of time and efforts.

Geographic diversification

Geographic diversification is used to place investments in several countries and regions of the world. This strategy assist in avoiding being overly clobbered when there is an economic crisis or political instabilities in a particular country. The expansion of capital to other countries enables beginners to access growth prospects all over the world.

New investors can start with ETFs or mutual funds with geographical locations of operations as an entry point. These funds provide, to the investor, a ready-made route to invest in different international markets without having to invest directly in specific foreign shares.

Benefits of geographic diversification

Geographic diversification is one of the four main here strategies, and its importance is evident in its strengths: these include risk avoiding. Thus, by investing in many regions, the negative impact of some country or region may be compensated by the positive results in other locations. This spread decreases geopolitical and economic risks.

Also, it provides the opportunity to access the growth market abroad. That could mean that certain areas would go through economic prosperity at a different time to others. Despite this case, beginners can reap from economic status and achievement in progress of these countries through investment abroad.

Considerations in geographic diversification

Any investment involves markets across the world, and therefore the changes in the foreign exchange rates are an important factor to consider when investing. Fluctuation in the exchange rate can either contribute positively or negatively to the firm’s performance. First, regarding risks, starting traders should be conscious of them and be ready to use hedging measures if needed.

The last one is political risk, This reason is related to the political situations which are unstable in certain regions, and they may affect the investment environment or the production of firms. As already stated, political risks differ between countries, and they pose a threat to the effectiveness of investment.

Lastly, there are additional costs and complexities, here the author is indicating the additional costs such as; Cross-border investments attract costs associated with transactions, taxes, and regulation than domestic ones.