Whoever came up with the homily “Don’t put all your eggs in one basket” would have made a great financial advisor. Every few years, the investment community receives a grim reminder that too much of a good thing in your clients’ portfolios can have disastrous results.

Think of the great stock market bubble of 2000. The tech-heavy Nasdaq composite index in the U.S. closed at an all-time high of 5048, more than three times its level in March 1997. The topic of the day was the wonder of the Internet and how technology had created a new economic paradigm.

The trouble was there was no new paradigm. When it comes to valuing companies, the bottom line was still the bottom line. The Nasdaq ultimately plummeted to a post-bubble low of 1114 in October 2002 — a staggering loss of 78% from its high.

The rules seemed to change in 2008, when virtually every investment portfolio lost money. The U.S.-born financial crisis saw Wall Street giants collapse and inves-tors around the world run for cover. Only three of 13 asset classes tracked by my firm reported gains that year — U.S. bonds, global bonds and Canadian bonds. Ten equity classes reported losses, from a U.S. small-caps decline of 17.2% to a whopping sell-off of 50.3% in “BRIC” equities — the emerging-markets of Brazil, Russia, India and China.

Then, in 2009, we saw a dramatic reversal of fortunes. The winners in 2008 were suddenly the dogs, as global and U.S. bonds finished the year in the red. Meanwhile, opportunistic equities investors could do no wrong, from the leading 75.1% return of the Canadian small-caps to the 7.4% gain reported by U.S. large-cap stocks.

We have just come through a challenging two-year period in the markets. We have learned once again that markets are fickle and impossible to call with any real certainty. But clients with well-diversified portfolios and the courage to stay invested have benefited. Diversification is the easiest and most assured way to ease volatility and maximize returns over the long term.

A balanced, well-diversified approach makes particular sense for Canadian investors. Consider the Toronto Stock Exchange. Our country’s leading blue-chip index posted a heady return of 42% for the 12- month period ended March 31. But that performance was greatly skewed by three sectors — financial services, materials and energy make up a whopping 77% of the S&P/TSX composite index. Clients with a strong Canadian bias are missing out on significant industries and some great investment opportunities, including health care, consumer goods, telecom and technology.

More important, Canada makes up less than 5% of the global investment climate. It makes no sense to turn your back on more than 95% of the world’s investment opportunities.

But don’t just take my word for it. Institutional investors and pension funds have attracted some of the brightest minds studying the markets today. The average Canadian equities weighting in pension plans in this country is about 20%. The average combined U.S. and global equities weighting? About 26%. In other words, Canada’s leading institutional money managers believe greater investment opportunities lie beyond our shores.

So, what do major institutional investors see that Canadians are missing? The opportunity of global diversification. And now is the time to act. The continued strength of the Canadian dollar is a key factor in making global equities cheap for all investors. I expect we will see more individual investors following this global diversification trend. IE



Don Reed is president and CEO of Toronto-based Franklin Templeton Investments Corp.