The Two Axes of a Portfolio
When advisors discuss balance, they often focus on asset allocation — specifically, the allocation of funds among stocks, bonds, and cash.
But that’s only one dimension of portfolio design. The other dimension is diversification, which involves spreading your investments across different opportunities and risks.
Together, they form the foundation of portfolio construction:
Y-axis → Asset Allocation: defines your risk level
X-axis → Diversification: defines your breadth of exposure
You need both to build a stable, growth-oriented portfolio.
What Diversification Really Means
Diversification doesn’t mean owning “a little bit of everything.” It means ensuring that no single company, sector, or country can sink your long-term plan and that your weights reflect that risk.
You’re not spreading your portfolio thin; you’re structuring it so that your returns don’t depend on a single outcome.
Breadth + Weighting = True Diversification
Many investors hold multiple ETFs or dozens of stocks, yet their portfolios remain highly concentrated.
Why? Because weighting matters.
If 40 % of your equity exposure is still in Canadian banks, you’re not diversified — just duplicated.
A portfolio split evenly between three ETFs may still have 70–80 % U.S. exposure if two of them track U.S. indices.
Even within dividend ETFs, weighting can tilt heavily toward a few large-cap names such as the Canadian Banks.
Proper diversification considers how much of your portfolio is exposed to each area — not just how many positions you hold.
Levels of Diversification
Find several ways you can diversify your portfolio as you need. It’s not required to diversify according to each method, but you should be aware of choosing or not choosing to diversify using one of the methods below.
Level | Focus | Example |
|---|---|---|
1️⃣ Company | Avoid single-company exposure | Don’t rely only on TD Bank or Apple |
2️⃣ Sector | Balance industries | Mix banks, utilities, tech, and healthcare |
3️⃣ Country | Spread across economies | Add U.S. and international exposure |
4️⃣ Currency | Hedge global volatility | Hold CAD, USD, and global ETFs |
5️⃣ Strategy | Blend factors and styles | Combine dividend growth, covered-call, and index ETFs |
6️⃣ Asset | Broader allocation | Mix equities, fixed income, real estate, and cash |
My portfolios are generally approaching diversification with methods 1️⃣, 2️⃣, 3️⃣, and 5️⃣.
When combined with thoughtful weighting, these layers ensure your portfolio is built on diverse returns rather than concentrated risks.
Why Diversification Works and When It Doesn’t Need To
Diversification is often framed as a universal truth, but it’s really a slider, not a switch.
Where you sit on that slider depends on your goals, confidence, and tolerance for volatility. Some investors seek focus because they believe in their edge or want to amplify returns. Others prefer balance, prioritizing consistency and stability over potential outperformance.
Attribute | 🎯 Concentrated (Greed Zone) | ⚖️ Moderately Diversified (Core + Satellite) | 🌐 Fully Diversified (Balanced) |
|---|---|---|---|
Correlation Impact | High — positions move together | Partial — some offsetting | Low — assets offset each other |
Volatility | Very high swings | Controlled, moderate swings | Lower and smoother |
Portfolio Behaviour | Fast gains and deep drawdowns | Strong upside with manageable risk | Smooth returns, slower growth |
Investor Type | Aggressive / Confident stock picker | Growth-oriented, disciplined investor | Conservative / Long-term planner |
No point on this table is wrong. It just defines how your portfolio behaves during both rallies and corrections.
The more concentrated your positions, the more your results depend on being right.
The more diversified you are, the more your results depend on time.
Diversification doesn’t eliminate risk, it trades concentration risk for consistency.
Diversification by Geography
Canadian investors often suffer from home bias, with over half their portfolios in domestic stocks.
Yet Canada represents less than 3 % of the global equity market and is heavily tilted toward banks, energy, and materials.
Expanding into the U.S. and international markets with ETFs like VFV, XAW, or XEQT brings exposure to technology, healthcare, and consumer sectors that are under-represented in Canada.
Diversification by Sector and Style
Even within equities, sectors move differently.
Defensive sectors like utilities and consumer staples hold up better in downturns.
Cyclical sectors like technology or consumer discretionary lead during expansions.
You can visualize this through a sector wheel that rotates over economic cycles — one sector’s strength offsets another’s weakness.
Style diversification adds another layer:
Growth ETFs (e.g., VUG, XIT) capture innovation-driven upside.
Value ETFs (e.g., VTV, ZDV) provide stability and income.
Diversification Across Strategies
Today’s investors often blend multiple ETF strategies:
Dividend Growth ETFs → steady, rising income
Covered Call ETFs → yield smoothing and downside cushion
Broad Index ETFs → low-cost market exposure
Each strategy behaves differently. The goal isn’t to chase the best performer but to combine them so the portfolio performs consistently across market environments.
Diversification and Correlation — Managing Global Economic Cycles
Diversification isn’t just about mixing stocks and bonds — that’s asset allocation.
True diversification means spreading your exposure across economic engines that don’t move in unison.
Every economy, whether it’s Canada, the U.S., Europe, or Asia goes through its own rhythm of expansion, inflation, and contraction. When one region slows, another often accelerates. That’s where diversification earns its keep.
Asset Allocation vs. Diversification
With Asset Allocation, you can manage volatility within a single country.
For example, a balanced mix of Canadian stocks and bonds reduces fluctuations during market stress.
But with Sector and Global Diversification, you go beyond volatility control, you gain access to opportunities that don’t exist locally.
Canada, for instance, lacks major pharmaceutical, technology hardware, or consumer brand giants that drive growth elsewhere.
By adding global exposure, you’re not just diversifying risk, you’re expanding your portfolio’s sources of return.
Why It Matters
Global cycles are rarely synchronized.
The U.S. may be cutting rates while Europe is tightening, or China may be stimulating growth while Canada is cooling off. Each region’s performance is tied to local drivers such as currency policy, demographics, commodities, or innovation cycles.Sectors move with different economic phases.
Energy thrives during inflation, while tech leads in low-rate environments. Utilities and staples shine when growth slows.Correlation shifts with time.
During global crises, everything can move together; during recoveries, dispersion creates opportunity. Managing diversification means anticipating those shifts, not just holding different tickers.
The Global-Cycle Mindset
Cycle Phase | Typical Leaders | Diversification Focus |
|---|---|---|
Expansion | Technology, Consumer, Industrials | Capture global growth trends |
Inflation | Energy, Materials, Real Assets | Hedge with commodity or resource exposure |
Slowdown | Utilities, Staples, Healthcare | Shift toward defensive stability |
Recovery | Financials, Cyclicals, Small Caps | Reposition for renewed growth |
By viewing diversification through economic lenses rather than asset labels, you build a portfolio that adapts naturally to where the world is, not just to what you own.
Diversification is not about owning more, it’s about being prepared for what’s next, wherever it happens.
How Diversification Evolves with Age
As you age, your asset allocation (Y-axis) usually becomes more conservative, but diversification (X-axis) remains essential at every stage.
Investor Stage | Typical Allocation Focus | My Allocation Focus | Diversification Focus |
|---|---|---|---|
🌱 Apprentice | 80/20 equity tilt | 100/0 growth | Learn ETF breadth and global exposure |
🪴 Achiever | 70/30 mix | 100/0 growth | Broaden across sectors and styles |
🌳 Strategist | 60/40 balance | 100/0 growth | Add factor and international diversification |
🌴 Master | 40/60 focus | 85/15 calculated | Emphasize income stability and low-correlation assets |
Common Mistakes
Over-diversifying with overlapping ETFs
Ignoring correlation (owning funds that behave the same)
Chasing returns or yield
Forgetting currency exposure
Failing to rebalance regularly
Wrapping It Up — The Diversification Grid
Picture your portfolio as a two-axis grid:
Y-axis = Asset Allocation (risk level)
X-axis = Diversification (breadth of exposure)
The sweet spot lies in the upper-right quadrant where you’re well-allocated and well-diversified.
That’s the foundation of long-term investing confidence.