Consider Your House And Career When Deciding Your Portfolio Diversification

Written on Jan 19, 2010 by Tom Drake

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Readers of Canadian Finance Blog have heard about the importance of a diversified portfolio that should include stocks from Canada, the US and internationally, plus bonds to reduce the volatility of your portfolio. What many don’t consider is how their house and career could effect the diversification of their investments.

How Your House Effects Diversification

Borrowing from your home equity is a popular way to invest. By using a Smith Manoeuvre, you can accelerate your investments and pay off your mortgage sooner. However, when looking to add further diversification to your portfolio, avoid using your Home Equity Line Of Credit (HELOC) to invest in Real Estate Investment Trusts (REIT) since they are so closely correlated. If the real estate market were to collapse, not only would your investments in REITs go with it, but the value would drop on the house that’s backing the loan.

How Your Career Effects Diversification

Some of the best corporations offer employees stock purchase plans at a lower cost than can be obtained by the average investor. Sounds like a good idea? It is, though you may do best to sell at the end of the year and reallocate that money to other stocks. Why is this? One example comes to mind, Nortel. If you worked for Nortel and received stocks as an employee, once the company fell apart not only were your without a job but your investments were devastated at the same time. This same portfolio theory applies not just to the company you work for, but also the sector you work in. For example, if you work at a travel agency, investing in Air Canada or WestJet would leave you exposed to greater risk if travel is reduced due to changes in the economy, increased security or epidemic concerns.

That’s not to say that REITs and stocks from the corporation you work for are not good investments, but these diversification factors should be taken into account when deciding on your portfolio allocation.