December 2023 is upon us, and for many investors, this time of year prompts a crucial question: how best to utilize a lump sum, perhaps waiting to be invested in a Tax-Free Savings Account or Registered Retirement Savings Plan, to maximize year-end contributions?
If you’re sitting on $10,000 and wondering about the most effective way to deploy these funds, you’re not alone. The choice of where to invest is deeply personal and varies based on individual factors like risk tolerance, investment objectives, and time horizon.
While the final decision ultimately depends on your unique financial situation and preferences, I can share how I would invest a similar amount. My strategy revolves around a highly diversified global exchange-traded fund (ETF) encompassing both stocks and bonds.
Why should you diversify?
Diversification is a fundamental concept in investing aimed at reducing risk by spreading investments across various assets. But how does it work?
Let’s walk through the different levels of diversification as I see them to understand what each step entails and addresses:
- Single Canadian Stock: Investing in a single Canadian stock is the least-diversified option. It exposes you to a high level of company-specific and industry-specific risk. Any adverse events affecting the company or its sector can significantly impact your investment.
- Single Canadian sector: Expanding from a single stock to a single sector (like energy or finance) in Canada reduces some company-specific risks but still exposes you to sector-specific risks. If the entire sector faces downturns due to economic, regulatory, or technological changes, your investment could suffer.
- Canadian stock market: Diversifying across the entire Canadian stock market reduces both company-specific and sector-specific risks. However, it still leaves you exposed to risks associated with the Canadian economy as a whole. Economic downturns, policy changes, or national economic trends will impact your investment.
- Global stock market: Investing in a global stock market ETF or fund expands your investment across various countries and regions, mitigating risks associated with any single country or region. This level of diversification exposes you to a wide range of economies, industries, and market dynamics.
- Global stock and bond market: The most diversified level involves investing in both global stocks and bonds. This approach spreads your investment across different geographic regions and sectors and across asset classes. Bonds often move inversely to stocks, providing a cushion during stock market downturns.
My ETF of choice
An ETF that hits the fifth level of diversification noted above is BMO Growth ETF (TSX: ZGRO). This ETF encapsulates both global stocks and bonds, offering a diversified portfolio in a single investment vehicle.
Its allocation is particularly noteworthy: with 80% in stocks and 20% in bonds, ZGRO strikes a balance between growth potential and risk mitigation.
The predominance of stocks in its allocation aligns ZGRO with growth objectives. The equity component allows investors to participate in the potential upside of global stock markets, offering exposure to a variety of sectors and regions.
Meanwhile, the 20% allocation to bonds provides a cushion against market volatility, adding a layer of stability to the portfolio. This mix is well-suited for investors looking for growth but with a moderated level of risk compared to an all-equity portfolio.
Another attractive feature of the BMO Growth ETF is its cost efficiency. With an expense ratio of just 0.20%, it’s a cost-effective way to access a diversified mix of global assets.
For a $10,000 investment in ZGRO, you can expect to pay around $20 in annual fees, which is relatively low considering the broad market exposure and professional management you’re getting.
