Chiara: Welcome to the ETF Experience podcast, where we unlock the secret powers of diversification for every do-it-yourself investor. Joining me today is returning guest Trevor Cummings, helping me to reveal how blending various asset classes can lower risk, boost returns and pave the way to long term financial success. Trevor, welcome back. How are you?
Trevor: I'm well. Yeah, Good to be back. Thanks.
Chiara: Awesome. Thrilled to have you back. So, we often hear that diversification is the only free lunch. I want to bring it back to basics. Talk to me. What is diversification?
Trevor: So, I mean by technical definition, I suppose diversification means spreading your risks around. So, you can think of that in the context of building a portfolio as buying different asset classes or investing in different asset classes like cash and bonds and stocks. You can think of diversification into terms of different geographies as well. How much Canadian content or exposure do I want in my portfolio versus U.S. versus international? Or maybe I want emerging markets things, things of this nature. I think maybe an analogy or two to sort of explain the concept. You know, we're in the midst of a playoff run these days as the playoffs are taking place right now. And it would be not impossible, but it would be highly unlikely to win the Stanley Cup if your team consisted entirely of goalies or defenseman. You need a well-rounded team. You need different roles on a team and different strengths really to be able to accomplish the end goal. Maybe another one more, maybe a travel analogy. It doesn't matter if you're in New York City, if you're in Europe, they're the street vendors, and what you'll often find is they have umbrellas and sunglasses for sale. Now you're never really going to need to buy both of those at the same time. But the street vendor is diversified. The street vendor wants to have something to sell to the public as they're walking by. So that kind of is what diversification is more technically speaking and maybe more conceptually.
Chiara: I like that sunglasses and umbrella analogy. They have different utility cases, right? And I find with different asset classes that can also be the same when thinking about investments. I also want to mention that, you know, diversifying you can also diversify across timeframes, right? And with the use of, you know, bond laddered ETFs, you can also have access to different time frames to weather out interest rate sensitivity depending on the bond and the duration exposure that you have. Some do it yourself. Investors may be concerned that if they diversify, it might cause them to miss out on, you know, some rallies in the equity markets. So, walk us through does diversification hurt returns?
Trevor: Probably not. I mean, I guess you could make the case when if you didn't put all of your eggs into one basket, into one investment and that investment absolutely went. MOON.
You will not accomplish as much of a return if you were invested a little bit in that security or that investment versus a lot of it. But the reverse is also true. You know, there are investments out there. There's a lot of speculation in the markets these days, and there are investments out there that do unfortunately go to zero. And so, the reverse is also true. It's really about cutting off those extreme possibilities or probabilities. You don't want to put all of your investments into one investment that could ultimately do really, really well or could do ultimately very, very poorly. And so, at the end of the day, it does mean perhaps limiting the maximum upside, but it also means limiting the maximum downside. There are so many studies out there that indicate as investors, we are all twice as sensitive to losses as we are to gains a dollar $100,000 profit feels about half as good as the pain of $1,000 loss or $1,000 loss feels twice as painful.
And so really, diversification isn't so much about limiting your upside. It's more about focusing on limiting your downside to make sure that you don't make a poor investment decision while the markets are frothy or where there's some uncertainty out there.
Chiara: And I, I like the comment that you just mentioned that, you know, if let's say you see your investments dropped ten, 20%, your willingness to get back into the market is hindered because of that really tough experience that you just went through. Right. So having a diversified portfolio allows you to have some peace of mind if you will, and stability when we're navigating these volatile markets like we've seen at the start of this year. Right. Last year, 2024 was an exceptional year for equities. Right. Double digit returns. But look at the start. Look at 2025 were down. Right. So, I think, you know, navigating the current market today just further proves why diversification is so important. I believe TAM has produced a great brochure that really highlights the benefits of diversification, showing that from 2015 to 2024, returns of a while diversified portfolio provide a steady return. Like, you know, you've mentioned, and we talked about, when is it a good time for investors to think about diversification? Is it only when, you know, you see really volatile markets? Walk us through what is a good time?
Trevor: I'd say now and forever. You know, I think when you're building a portfolio and you're just starting out as an investor, there is this premise or there's this school of thought that you can take a really aggressive stance in the markets because if you lose everything and you're 20 years old or you've got 40 or 50 years' worth of your investing life to make up for those losses. I want to present another argument, though, which is if I invest in a diversified portfolio as a new or a young or a beginning investor, I have the magic or the real power of compounding. I return over 30 or 40 or 50 years, and that's going to be far, far more impactful to someone's life, someone's investing outcome than did I take a lot of risk at the outset and put all my eggs in one basket or bet all in black or something like that. So, you want to diversify from the outset. You know, as your portfolio grows, you can think about maybe tilting or leaning towards certain asset classes. You can make decisions like that. But first things first is you probably want to start with a diversified portfolio. You asked about market conditions and there are going to be times when everything's coming up roses. It's all rainbows and sunshine and puppy dogs and whether you're diversified or not, you're doing really, really well. But there are also times in the market when only some things are working. And if you're all invested in the other things, you're in for some pain. So, it's better to have a little bit of everything when there's uncertainty so that you're able to sort of stay invested and ultimately ride out that storm.
Chiara: Yeah.
So, Trevor, let's get practical. If I'm a newbie investor, what are some strategies? How can I think about diversifying in my portfolio?
Trevor: I think one of the things you can do to start is buy everything you know, think about index mutual funds or exchange traded funds that are very, very broad, be diversified across sectors of the economy or the markets across businesses of different sizes, whether they're smaller names or larger, more blue-chip names. You can think about different geographies. So again, Canada, North America, the rest of the world and so on and so forth. And there are ETF and index mutual fund tools to do that. We've actually gotten to a place in the ETF industry where there are one ticket solutions where with a single investment, you're broadly diversified across geographies and asset classes, putting, say, stocks and bonds together in a single portfolio. You know, some of the benefits maybe to that approach is part of the utility there is that they automatically rebalance. And so, you can focus on automating your savings, you know, putting in a regular amount of savings on a regular basis as you're paid or monthly or something like that. And then you can really know that your investments are not going to become undersupplied because the tool in question rebalances on your behalf. So, there are some who are going to want to be more hands on and more, you know, involved But for the rest of us, we can really automate this process and just get back to living our lives.
Chiara: I think that asset allocation ETF is such a great tool for those that are maybe not so sophisticated and don't want to take care of that rebalancing themselves. Often times, you know, you see markets move and cause your asset allocation to mix and sometimes that might cause you to be over concentrated, right? So, using these asset allocation ETFs are kind of a one ticket solution that will give you that diversification, that asset mix that you would like. But you don't have to worry about the headache of rebalancing, right? So, I think that that's a great tool. You know, we've covered why, but what about my "worsification"? Is there such thing as over diversifying?
Trevor: I don't know. I don't know. I mean, the thing is this, right? I'll drop another analogy maybe into the chat here. Right. If you're building a brand-new house in Canada, one of the first things you're going to do is dig the hole, right? And then the next thing you're going to do is you're going to pour the walls of a basement, right? You're going to build the foundation of that home. You're going to frame it up. And then once the sort of the structural elements are out of the way, you put the brakes on, you put the shingles on the roof, you put the windows in, then things start to get really interesting and probably a little bit more fun. You know, that's when you get to choose what your kitchen is going to look like, the tiles in your bathroom, your countertops, your paint colors and so on and so forth. And I think that's really portfolio construction as well. You've got to get first things first and broadly diversify our portfolio, if that's all you ever did. Unlike building a home, you could stop there. You can't really live in a house that's framed up and has a basement wall and doesn't have any brick, a roof, shingles or windows for that matter. But you could do that with investing. You don't have to get really granular or get into specifics so you could stay diversified. I don't think there's really a downside to being diversified. You have to be comfortable with acknowledging that, again, you'll never do you'll never win that lottery ticket, but you'll never actually lose everything if you're diversified in a portfolio. And that's a great place to start.
Chiara: That's great to hear. Last thing I want to cover is when we talk about portfolio construction, we always talk about the correlation between different asset classes. Maybe, you know, share with some investors how we incorporate correlation in portfolio construction.
Trevor: So, correlation briefly is just a measure of how much things move in tandem. So, if one investment goes up and the other investment goes up at the same time, let's say to the exact same percentage of the exact same degree, you're not very diversified because they are going to move up and they're going to move down in sympathy with one another. There are other investments that have a low correlation or even a negative correlation, which, you know, I suppose is a bit of a unicorn. But if you can get one investment that goes up as the other goes down and vice versa, then there's always, you know, knock on wood, there's always something that's working within a portfolio. You know, you can't really build up a portfolio of things that are correlated to negative one. You can build a portfolio of things that are correlated to one. So, the more again, the more things you have in a portfolio, the more diversify fired you are. There's an old saying that diversification is the only free lunch in investing. And it's true, 50, 60 years ago when that phrase was first coined as it is today also.
Chiara: Well, thanks for sharing those insights. You know, I diversified portfolio can help provide lower levels of volatility and higher risk adjusted rate of returns. Diversification is your shield against market storms helping you stay focused on your financial goals. Thank you, Trevor, for joining me today. And thank you all for listening.
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